The parent company of Emigrant Bank of New York is struggling to hang on until real estate asset values in its markets recover.

Though the $16.4 billion-asset company, led by the real estate developer Howard Milstein, insists its problems are under control, analysts paint a bleak picture of a company that could snap under further stress without additional capital.

"The assumption is if the company gets weaker, or if they're forced to raise capital, the Milstein family would pony up the additional funds to bring it in the 'adequately capitalized' status that would make the regulators happy," said Matt Kelley, a senior analyst at Sterne Agee.

Howard Milstein, with his brother Paul, acquired Emigrant Savings Bank in 1986. In 2005, the family formed the holding company, New York Private Bank and Trust, which includes six bank subsidiaries in the New York area and a thrift in Wilmington, Del. With $12.8 billion in assets, Emigrant is by far the largest unit.

Though the company built a successful online banking operation that raked in deposits, it has post losses of $500 million over the past two years. While a 2008 writeoff of its investment in Freddie Mac is partly to blame, the core problem is asset quality, which has deteriorated sharply.

Emigrant's noncurrent loans jumped 123% last year, to $662.7 million, according to data from the Federal Deposit Insurance Corp. Noncurrent loans were 13.53% of its total loans at yearend, a steep increase from a year earlier, when that ratio was just 5.08%.

Problem real estate and industrial loans are the main culprit. Fully one-third of Emigrant's commercial and industrial loans are not being paid back, along with 14% of residential mortgage loans.

Suzanne Moot, an analyst with M&M Associates in Milton, Mass., said Emigrant may have had little warning, as less than 1% of commercial and industrial loans were in nonaccrual status one year earlier.

"These appear to be a whole bunch of loans that went bad in the last 12 months — went very bad," Moot said.

Because New York Private is privately held, it's almost impossible for outsiders to know where the loan portfolio is headed, Moot added.

Yet the company insists its bank and thrift subsidiaries are solid. John Hart, vice chairman of Emigrant Savings Bank, said in a written statement on behalf of the company that "Emigrant Bank and its regional banks have weathered the current adverse banking environment."

He said in the statement that the company has begun working through its problem assets and has significant Tier 1 capital.

The parent company received a $267 million investment from the Treasury Department's Troubled Asset Relief Program in January 2009 that it distributed to its subsidiaries. Emigrant Bank reported Tier 1 capital ratio of 12.45% as of Dec. 31.

Hart said Emigrant Bank is holding troubled loans until markets recover, and noted it was able to sell $400 million in problem commercial real estate loans in the fourth quarter. He said the company expects classified assets to return to normal levels by the end of 2010.

"While there are a large number of loans with delinquencies, many of these will be reinstated while the vast majority of the remaining will, when foreclosed, not result in losses," he said.

While nonperformers are a big chunk of total assets, troubled loans have leveled off since a jump in the first quarter of 2009, said Matt Anderson, a managing director at Foresight Analytics.

"So it's possible that things are more or less stabilizing," Anderson said.

Ken Thomas, an independent bank consultant and economist in Miami, said New York Private's subsidiaries are among some of the most under-reserved banks in the nation — meaning their ratio of loan-loss allowances to problem loans is much lower than other banks.

"For every dollar you have on a problem loan, strong banks they put a dollar in the cookie jar, sometimes more, against that," he said.

For a long time, the average reserve coverage ratio was at 100% — dollar for dollar — but the average national ratio has fallen to about 60%, Thomas said.

Only 32 banks have reserve coverage ratios under 5%, Thomas said, and three of those are units of New York Private. Thomas pegged Emigrant's coverage ratio at 13.5%. Hart declined to discuss coverage ratio data.

Thomas said Emigrant will need additional reserves if its loan portfolio continues to deteriorate.

"That's my biggest concern — where are they going to get needed additional infusions of capital with continuing problem loans and the need for additional reserves?" he said.

The company's Texas ratio — its problem assets relative to capital and loan-loss reserves — is also dangerously high, said Gerard Cassidy, the managing director of bank equity research at RBC Capital Markets.

That ratio is considered a crucial measure of a bank's financial health. A ratio exceeding 100% is considered a sign that a bank is on the verge of failure. New York Private's ratio was 104% on Dec. 31, Cassidy said.

"A lot of people want to know exactly when a bank is going to fail, and you can't say that with just one specific number," Cassidy said. "But a company with a Texas ratio over 100% has got very serious problems. So if they bring in more capital and sell off more bad loans, obviously that's a positive."

Kelley, the Sterne Agee analyst, said he "would not put Emigrant into the seventh or eighth inning" quite yet.

"I think there's still some time for some type of capital to be raised, and a workout process to proceed," Kelley said.

In his statement, Hart said "Emigrant has very substantial reserves for potential actual loan losses and believes they far exceed what will actually be experienced."

He said the company's losses are being overstated by accounting rules that require assets to be marked to market, and would likely be reversed when asset values recover.

Hart also mentioned the family's substantial wealth in his statement, and noted that the Milsteins had "rescued" Emigrant Bank once before — when the family acquired the bank during the savings and loan crisis.

But rather than planning a rescue this time, Hart said the company is considering large acquisitions, given its "strong foundation and capital position, and other resources as needed from the Milstein family."

But Thomas said he's doubtful that Emigrant is in a position to buy other banks.

"I would be surprised if regulators are not going to be clamoring for additional capital because of the continued trend in losses," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.