Largest privately held bank in the U.S. still hasn't paid back Uncle Sam's TARP loan

Every major financial institution in New York has settled its debt with the Treasury -- except Emigrant Savings Bank.

Feb 22, 2010 @ 8:13 am

By Aaron Elstein

A year after taxpayers bailed out the nation's financial system, every major bank in New York has settled its debt with Uncle Sam except one: Emigrant Savings Bank.

The 160-year-old institution, the nation's largest bank in private hands, has yet to repay its $267 million in rescue money. The unprofitable bank is so riddled with dud loans and poor investments, it might need another infusion of bailout cash unless the Milsteins, the real estate family that has owned the bank since 1986, inject millions more into the enterprise.

Data filed with the Federal Reserve Board by Emigrant's parent, New York Private Bank & Trust Corp., spell out the difficulties at the institution, which has $16 billion in assets. Delinquent loans and other nonperforming assets tripled, to $1 billion, over the 12 months that ended last Sept. 30. As a percentage of loans, they are three times higher than at comparable banks. Despite the elevated number of troubled loans, the bank's loan-loss reserves and capital levels are substantially lower than peers'. Emigrant posted a $229 million net loss through the first nine months of 2009; early last year, the bank told Crain's its distressed loans would not result in losses unless real estate values declined another 40%.

Perhaps most alarming, the bank flunks a crucial measure of financial health: Its capital is exceeded by its nonperforming assets and loan-loss reserves. This measurement is known as the “Texas ratio,” and a reading above 100% indicates that a bank is in danger of failing. IndyMac Bancorp, for example, had a Texas ratio of 140% before it collapsed in 2008. The Texas ratio at Emigrant's parent is 113%.

“It means your sandbags to protect against the flood are getting deluged,” says Gerard Cassidy, a banking analyst at RBC Capital Markets.

Mr. Cassidy finds it startling that Emigrant is in such a situation. The bank has more than $11 billion in customer deposits at 34 branches in the city and suburbs and through an online operation. The Milsteins built their fortune—estimated by Forbes to be $3.8 billion—on savvy real estate investing, and Chief Executive Howard Milstein has in years past deftly steered the bank clear of the mortgage problems that sank rivals.

“Emigrant has never shown a Texas ratio anything close to what it is today,” Mr. Cassidy says.

Mr. Milstein was traveling and unavailable for comment, according to a spokesman. In response to e-mailed questions, the spokesman writes that operating results remain “strong,” and he attributes the bank's reported losses to accounting rules.

“Many of the accounting losses on Emigrant's financial statements are not the result of actual losses but are required to be reflected,” he emphasizes. “Emigrant expects that asset values for a significant portion of these assets will improve.”

The bank, the spokesman adds, has “very substantial reserves for potential actual loan losses and believes they far exceed what will actually be experienced.”

Like many big banks, Emigrant has been tripped up by souring residential mortgages, bad business loans and subpar private equity investments. But Emigrant, with roots as a savings and loan writing home mortgages, seems to have made the classic mistake of joining the party just as the punchbowl was running dry.

The institution's commercial and industrial loan portfolio jumped by 60% in 2007, to nearly $1 billion. Mr. Cassidy wonders if Emigrant started buying more loans originated by other banks. Whatever the case, the recession soon hit, and the bank now isn't collecting interest payments on fully one-third of C&I loans.

Emigrant seems to have upped its bet on the Milstein family favorite—real estate—at the wrong time. Fully 60% of its investment portfolio is in mortgage-backed securities, triple the level in 2006. It isn't clear if these securities contain government-guaranteed mortgages, but analysts say even if they do, they've probably lost value.

Its $150 million private equity arm, Emigrant Capital Corp., is also suffering from unfortunate timing, with four investments in 2006 as the M&A whirl hit overdrive. Two companies, representing 20% of the division's investment portfolio, filed for bankruptcy last year: Forward Foods, the maker of Detour protein bars, and Jolt Cola, the super-caffeinated soft drink. Jolt's founder has since sued Emigrant for allegedly driving his company into the ground and seeks $31 million in damages. Emigrant wouldn't comment.

All of this has left Emigrant with a thin capital base, even with the bailout millions. Using a strict definition of capital that analysts often turn to in hard times, Emigrant's tangible capital ratio is only 2.6%, compared with 5.5% for its peers. (Emigrant prefers to cite another form of capital, known as Tier 1; under this definition, the spokesman says, the bank's capital ratio is more than 12.5%, about twice the regulatory requirement.)

“They need as much capital as they can get their hands on,” says Fitch Ratings analyst Eric Newell, who last summer cut the bank's credit ratings from investment grade to junk. His outlook is “negative.”

As the bank's fortunes have declined, the Milsteins have stepped in to shore up its coffers. In 2008, they injected $110 million into Emigrant, and in 2007 they put in $60 million, according to Fitch.

Might family members dig into their pockets again to help their bank? Mr. Newell says Fitch can't count on such a scenario.

“Our ratings don't take their support into account,” he explains, “because we don't have the ability to assess their desire to provide it in the future.”

[This story first appeared in Crain's New York Business, a sister publication of InvestmentNews.]


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