israel discount bank of new york
TRANSCRIPT
October 19, 2016
Israel Discount Bank of
New York
Analytical Contacts:
M Scott Durant, Associate Director
[email protected], (301) 969-3248
Joseph Scott, Managing Director
[email protected], (646) 731-2438
Christopher Whalen, Senior Managing Director
[email protected], (646) 731-2366
U.S. Financial Institutions
Bank & BHC Surveillance Report
Israel Discount Bank of New York Page 2 October 19, 2016
Table of Contents
Executive Summary ......................................................................................................... 3
Key Rating Drivers ........................................................................................................ 3
Financial Metrics ............................................................................................................ 4
Comparative Statistics ................................................................................................... 5
Rating Rationale............................................................................................................... 5
Key Quantitative Rating Determinants ............................................................................. 5
Liquidity .................................................................................................................... 6
Asset Quality ............................................................................................................. 7
Capital Adequacy ........................................................................................................ 8
Earnings .................................................................................................................... 8
Key Qualitative Rating Determinants ................................................................................ 9
Market Strategy ......................................................................................................... 9
Risk Management ..................................................................................................... 11
Liquidity Management ............................................................................................... 12
Economic and Regulatory Framework .......................................................................... 12
External Support ......................................................................................................... 12
Outlook ...................................................................................................................... 13
Drivers of Rating Change ........................................................................................... 13
Israel Discount Bank of New York Page 3 October 19, 2016
Executive Summary
Kroll Bond Rating Agency (KBRA) has affirmed the following ratings for Discount Bancorp, Inc.’s
subsidiary, New York, New York based Israel Discount Bank of New York (IDBNY or “the Bank”) based on
KBRA’s Global Bank and Bank Holding Company Rating Methodology published on February 19,
2016.
Ratings
Entity Type Rating Outlook Action
Israel Discount Bank of New York Deposit A- Stable Affirmed
Senior Unsecured Debt A- Stable Affirmed
Subordinated Debt BBB+ Stable Affirmed
Short-Term Debt K2 N/A Affirmed
Short-Term Deposit K2 N/A Affirmed
Discount Bancorp, Inc., a bank holding company incorporated in Delaware, owns 100% of Israel Discount
Bank of New York. Consolidated assets totaled approximately $9.2 billion with deposits of $7.2 billion as of
June 30, 2016. Chartered by the State of New York, IDBNY focuses on middle market commercial banking
activities and private banking for high net worth individuals. Discount Bancorp, Inc. is regulated by the
Federal Reserve.
The Bank’s strategy is to focus on domestic growth in select markets, while maintaining its international
private banking relationships. The Bank has branches in the New York Metropolitan Area, Los Angeles
Area, and Southern Florida. The Bank’s international network includes representative offices in Mexico,
Uruguay, Chile, Peru and Israel to service private banking customers. In late 2015, IDBNY successfully
closed a transaction to transfer all assets ($1.3 billion) and liabilities of Discount Bank Latin America
(DBLA), its Uruguayan retail bank, to ScotiaBank.
IDBNY, through its U.S. parent, Discount Bancorp, Inc., is wholly-owned by Israel Discount Bank Limited
(IDB Ltd.), a $56 billion banking group based in Tel Aviv, Israel. IDBNY is a key operating unit of IDB and
is considered strategically important to the group. IDBNY operates as a standalone bank without any
intercompany risk between it and the ultimate parent, IDB Ltd. IDBNY plans on upstreaming a portion of
net income to the Israeli parent bank subject to comfortably exceeding “well capitalized” U.S. regulatory
capital ratios.
Key Rating Drivers
The ratings for Israel Discount Bank of New York are supported by the Bank’s experienced management
team, strong asset quality metrics, ample liquidity and funding profile coupled with a stable depository
base, and strong capital position. However, these factors are counterbalanced by the Company’s below
average profitability, though improvement is noted over previous years, and reliance upon spread-derived
income. KBRA expects continued improvement in profitability over the medium term combined with a gradual increase in noninterest revenue.
The A- rating of Israel Discount Bank of New York generally maps to a short-term rating of K2 on KBRA’s
short-term rating scale. Consistent with KBRA’s notching guidelines, the assigned rating of BBB+ for
subordinated debt for the Bank is notched one rating below the senior Bank rating.
Israel Discount Bank of New York Page 4 October 19, 2016
Credit Strengths
Conservative and experienced management team
Excellent asset quality metrics
Ample liquidity and solid customer depository base
Comfortable capital position
Credit Constraints
Profitability is improving but remains below average among rated peers. KBRA expects continued
improvement in profitability over the medium term.
Reliance on spread income, yet noninterest revenues anticipated to increase over time
Financial Metrics
Key Statistics 1H 2016* 2015 2014 2013 2012 2011
Total Assets (000s) $9,168,046 $9,321,896 $9,783,466 $9,603,713 $9,983,916 $9,487,504
Total Loans / Total Assets 59.56% 58.81% 53.16% 49.06% 41.97% 40.32%
Nonperforming Assets / Total Assets 0.42% 0.60% 0.31% 0.47% 0.41% 0.82%
Nonperforming Assets / Tangible Equity + Reserves 4.09% 6.12% 3.51% 5.20% 4.50% 9.01%
Reserves / Total Assets 0.73% 0.75% 0.67% 0.69% 0.71% 0.78%
Reserves / Nonperforming Assets 173.21% 125.99% 220.67% 147.27% 174.26% 95.04%
Net Charge-Offs / Average Total Assets 0.35% -0.02% 0.07% 0.21% 0.20% 0.30%
Net Charge-Offs / Provisions 124.40% -54.10% 127.44% 163.96% 115.16% 70.68%
Loan Loss Provisions / Average Total Assets 0.28% 0.03% 0.05% 0.13% 0.17% 0.43%
Total Deposits / Total Assets 78.12% 78.32% 79.49% 79.05% 74.80% 69.63%
Total Loans/ Total Deposits 76.24% 75.09% 66.87% 62.06% 56.11% 57.91%
Total Equity (000s) $879,094 $839,715 $784,345 $794,409 $838,436 $788,279
Net Revenue (000s) $220,968 $224,671 $213,617 $175,901 $220,223 $211,070
Tier 1 / RWA 13.07% 12.79% 11.93% 12.89% 14.19% 14.27%
Total Equity - Intangible Assets / Total Assets 9.59% 9.01% 8.02% 8.27% 8.40% 8.31%
Net Interest Margin 2.16% 1.87% 1.75% 1.45% 1.86% 2.10%
Net Interest Income / Total Revenue 76.99% 74.77% 74.75% 73.37% 73.00% 76.56%
Noninterest Income / Total Revenue 23.01% 25.23% 25.25% 26.63% 27.00% 23.44%
Return on Average Assets 0.67% 0.62% 0.23% 0.10% 0.45% 0.49%
Return on Equity 6.98% 7.15% 2.86% 1.18% 5.09% 5.81%
Efficiency Ratio 57.87% 61.87% 64.51% 69.36% 78.29% 68.09%
Double Leverage 98.91% 98.85% 98.75% 89.73% 87.31% 86.58%
Data Source: Discount Bancorp, Inc.'s Forms FR Y-9C *annualized where approriate
Discount Bancorp, Inc.
Key Statistics 1H 2016* 2015 2014 2013 2012 2011
$9,167,981 $9,321,831 $9,783,466 $9,600,085 $9,980,203 $9,483,877
59.56% 58.81% 53.16% 49.08% 41.99% 40.34%
0.42% 0.50% 0.31% 0.47% 0.41% 0.82%
4.14% 5.19% 3.56% 5.77% 5.11% 10.31%
0.73% 0.75% 0.67% 0.69% 0.71% 0.78%
173.21% 150.14% 220.67% 147.27% 174.29% 95.04%
0.35% -0.02% 0.07% 0.21% 0.20% 0.30%
124.40% -54.10% 127.44% 163.96% 115.16% 70.68%
0.28% 0.03% 0.05% 0.13% 0.17% 0.43%
78.23% 78.43% 79.60% 79.93% 75.89% 70.77%
76.13% 74.99% 66.78% 61.40% 55.33% 57.00%
$869,030 $829,559 $774,004 $709,457 $728,622 $679,090
$220,964 $224,669 $212,929 $175,459 $219,335 $210,987
12.91% 12.65% 11.77% 11.61% 12.38% 12.38%
9.48% 8.90% 7.91% 7.39% 7.30% 7.16%
2.17% 1.91% 1.83% 1.53% 1.94% 2.17%
76.99% 74.77% 74.95% 73.31% 72.89% 76.56%
23.01% 25.23% 25.05% 26.69% 27.11% 23.44%
0.68% 0.62% 0.23% 0.09% 0.45% 0.49%
7.08% 7.26% 2.87% 1.29% 5.79% 6.75%
57.80% 61.79% 64.48% 69.48% 78.54% 68.08%
Data Source: Israel Discount Bank of New York's Forms FFIEC 041 *annualized where approriate
Efficiency Ratio
Net Interest Margin
Net Interest Income / Total Revenue
Noninterest Income / Total Revenue
Return on Average Assets
Return on Total Equity
Israel Discount Bank of New York
Total Equity (000s)
Net Revenue (000s)
Tier 1 / RWA
Total Equity - Intangible Assets / Total Assets
Total Loans / Total Deposits
Total Assets (000s)
Total Loans / Total Assets
Nonperforming Assets / Total Assets
Nonperforming Assets / Tangible Equity + Reserves
Reserves / Total Assets
Reserves / Nonperforming Assets
Net Charge-Offs / Average Assets
Net Charge-Offs / Provisions
Loan Loss Provisions / Average Total Assets
Total Deposits / Total Assets
Israel Discount Bank of New York Page 5 October 19, 2016
Comparative Statistics
Rating Rationale
KBRA’s deposit and senior unsecured debt ratings of A- and K2 for IDBNY are supported by the following
factors: i) a quantitative view of the Bank’s financial fundamentals, including stress testing, ii) a
qualitative assessment of the Bank’s management and market strategy, and iii) the incorporation of
potential external systemic support. Consistent with KBRA’s notching guidelines, the Bank’s subordinated
debt is rated BBB+, one notch below its deposit and senior unsecured debt ratings.
Key Quantitative Rating Determinants
The quantitative financial fundamentals of IDBNY are reflected in the primary credit rating (PCR) of A-,
which is derived from the financial strength rating (FSR) and potential adjustments to the FSR due to
KBRA’s stress testing as well as analysis of current and historical financial metrics.
Key Statistics
Discount
Bancorp, Inc.
Customers
Bancorp, Inc.
Brookline
Bancorp, Inc.
First Financial
Bancorp
Eagle
Bancorp, Inc.
United
Financial
Bancorp, Inc.
Banc of
California Inc.
Total Assets (000s) $9,168,046 $9,684,625 $6,319,957 $8,310,102 $6,366,438 $6,417,727 $10,157,662
Total Loans / Total Assets 59.56% 86.90% 83.24% 68.73% 85.81% 74.36% 70.19%
Nonperforming Assets / Total Assets 0.42% 0.30% 0.54% 0.40% 0.38% 0.67% 0.85%
Nonperforming Assets / Tangible Equity + Reserves 4.09% 4.18% 5.68% 4.77% 3.30% 7.80% 9.97%
Reserves / Total Assets 0.73% 0.39% 0.91% 0.68% 0.89% 0.59% 0.37%
Reserves / Nonperforming Assets 173.21% 130.01% 168.22% 171.90% 232.28% 87.88% 43.30%
Net Charge-Offs / Average Total Assets 0.35% 0.01% 0.14% 0.06% 0.10% 0.07% 0.00%
Net Charge-Offs / Provisions 124.40% 21.84% 89.74% 41.85% 44.47% 35.46% 6.70%
Loan Loss Provisions / Average Total Assets 0.28% 0.06% 0.16% 0.14% 0.22% 0.20% 0.04%
Total Deposits / Total Assets 78.12% 69.72% 71.46% 73.64% 83.81% 69.66% 78.06%
Total Loans/ Total Deposits 76.24% 124.64% 116.49% 93.33% 102.38% 106.75% 89.92%
Total Equity Capital (000s) $879,094 $680,562 $689,656 $846,723 $789,282 $644,193 $939,884
Net Revenue (000s) $220,968 $262,888 $212,442 $327,502 $265,338 $183,844 $472,696
Tier 1 / RWA 13.07% 8.56% 10.64% 10.07% 10.74% 10.32% 13.14%
Total Equity - Intangible Assets / Total Assets 9.59% 6.85% 8.58% 7.65% 10.70% 8.03% 8.18%
Net Interest Margin 2.16% 2.86% 3.40% 3.59% 4.24% 2.91% 3.37%
Net Interest Income / Total Revenue 76.99% 90.00% 89.49% 78.90% 90.55% 86.42% 63.52%
Noninterest Income / Total Revenue 23.01% 10.00% 10.51% 21.10% 9.45% 13.58% 36.48%
Return on Average Assets 0.67% 0.84% 0.83% 1.04% 1.57% 0.66% 0.98%
Return on Equity 6.98% 10.91% 7.39% 10.01% 12.19% 6.50% 9.83%
Efficiency Ratio 57.87% 53.49% 57.71% 59.02% 40.25% 71.60% 78.93%
Double Leverage 98.91% 105.83% 99.51% 105.72% 100.42% 102.57% 108.81%
Data sources: FR Y-9C and FR Y-9LP
Rated Peer Comparison as of June 30, 2016
Israel Discount Bank of New York Page 6 October 19, 2016
Liquidity
IDBNY has maintained a
very conservative liquidity
profile. This is partially due
to the strict regulatory
regime under which its
parent, IDB Ltd., operates
in Israel. Despite the
operating independence of
IDBNY from its parent, as a
subsidiary its does abide by
many of the same
regulatory requirements,
though it is not required
under domestic regulatory
oversight. Given this, the
Bank maintains a significant
level of investments deemed favorable as high quality liquid assets (HQLA) under Basel III regulations
which are included in the liquidity coverage ratio (LCR) that the Bank calculates on a daily basis; the LCR
was 112.4% as of June 30, 2016 and averaged 113.2% for the month of June 2016, exceeding the
minimum threshold of 100%.
The deposit mix for IDBNY continues to be skewed towards interest bearing accounts. Additionally, IDBNY
maintains a higher level of time deposits relative to many of its U.S. peers. Much of this is attributable to
the private banking business line in which the Bank operates. Further, the Bank subscribes to the
Certificate of Deposit Account Registry Service, which alters the level of brokered deposits attributable to
the Bank; core brokered deposit levels are considered modest. Noncore funding sources are diverse in
nature and include Fed Funds availability, repo capacity, brokered deposit availability, and borrowing
capacity with the Federal Home Loan Bank of New York (FHLB); available funding capacity totaled
approximately $1.6 billion as of June 30, 2016.
Israel Discount Bank of New York Page 7 October 19, 2016
As mentioned previously, the
investment securities portfolio
is mostly centered in
instruments that qualify for
favorable treatment in the
HQLA calculation. These
include U.S. Treasurys and
U.S. guaranteed agency
investments issued by the
Government National Mortgage
Association (GNMA). These two
investment categories account
for approximately 55% of the
total portfolio. Other
investments include those in
other agency mortgage-backed securities (MBS), state and local municipal bonds, and corporate bonds
holdings. Ninety-nine percent of the portfolio is investment grade-rated with seventy-eight percent rated
as AAA. The average duration for the $2.8 billion portfolio is 3.8 years which is in line with many peers.
Extension risk appears well contained with IDBNY management pursuing an investment strategy which
does not purchase investments above par values.
KBRA believes liquidity is conservatively managed. The Bank maintains an ample level of liquid assets
combined with a growing customer deposit base, particularly domestic deposits. Those deposits that are
derived internationally have historically been very stable. At 76% as of June 30, 2016, the loan to deposit
ratio for IDBNY compares well to the average of rated peers. At the Bank level, primary sources of
liquidity including liquid assets and estimated unused borrowing capacity totaled over $1.6 billion as of
mid-year 2016. This estimate is based on excess cash, FHLB of NY capacity, repo capacity, Fed Funds
availability, and brokered deposit availability. Liquid assets at the U.S. based holding company totaled
$9.5 million at mid-year 2016, with no liabilities.
Asset Quality
The Bank has seen slight
deterioration in its asset quality
metrics since year-end 2015,
though it still has comparatively
strong asset quality. The level
of nonperforming assets
relative to total assets and
charge-off experience remain
superior to respective peer
averages. Much of the increase
in nonperforming assets is
attributable to only a few
borrowers and only several
properties. Management has
indicated that the Bank
anticipates resolution on one of
the credits by year-end 2016. -10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2Q1620152014201320122011
$ T
ho
usan
ds
Asset Quality Trends Israel Discount Bank of New York
Charge-offs
Provisions
Total NPAs
Israel Discount Bank of New York Page 8 October 19, 2016
As of mid-year 2016, the Texas ratio of just 4.09% compares favorably to the KBRA BBB+ rated average
of 6.43% for bank holding companies. IDBNY is a conservative credit underwriter with deep knowledge of
its customers and markets of operation. During the financial crisis and its aftermath, IDBNY’s level of
nonperforming assets and charge-off experience were considerably better than the track records of many
banks. Construction and development exposure remains relatively low with zero losses even during the
financial crisis.
Capital Adequacy
Capital ratios remain well above regulatory minimums to be considered well capitalized. The Tier 1 risk-
based capital ratio of 13.07% was above the KBRA BBB+ rated average of 11.14% for bank holding
companies and the ratio of tangible equity to assets was in line with peer averages. IDBNY’s economic
capital position is viewed even more positively, given the low risk nature of IDBNY’s asset mix,
conservative level of loan loss reserves and favorable charge-off experience. Double leverage was below
100% at June 30, 2016, indicating no reliance on debt at the U.S. based holding company to finance an
equity investment in IDBNY.
Earnings
Profitability as measured by return on assets (ROA) has remained below average among rated peers,
though it has steadily improved as expected by KBRA. In 2013 and 2014, reported profits were negatively
affected by various one-time expenses. In 2014, charges were taken related to the sale of the Bank’s
portfolio of trust preferred securities issued by other financial institutions. This sale was in response to
Basel III capital rules which punitively treat holdings of preferred investments in other financial
institutions. In addition, moderate charges were taken in late 2014 following the definitive agreement to
sell DBLA to ScotiaBank. Net income in 2015 rebounded substantially with return on average assets
(ROAA) increasing to 0.62% as the Bank returned to its core operation and without the inclusion of one-
time expenses.
Loan Type
Portfolio
Value ($000s)
Gross NPLs
($000s)
Percentage
Nonperforming
Construction & Development $181,585 $0 0.00%
Commercial Real Estate $1,655,131 $14,450 0.87%
Residential Mortgage $14,191 $0 0.00%
Commercial & Industrial $2,348,423 $3,628 0.15%
Consumer $112,614 $0 0.00%
Multi-Family Loans $65,390 $0 0.00%
Other $1,097,109 $20,647 1.88%
Leases $0 $0 0.00%
Total Loans $5,460,601 $38,725 0.71%
Source: FR Y-9C
Discount Bancorp, Inc. Portfolio Asset Quality - 2Q16
2Q16 2015 2014 2013 2012 2011
Tier 1 leverage ratio 9.54% 9.16% 8.13% 8.71% 8.96% 8.56%
Tier 1 risk-based capital ratio 13.07% 12.79% 11.93% 12.89% 14.19% 14.27%
Total risk-based capital ratio 14.09% 13.85% 12.94% 13.90% 15.39% 16.48%
Data Source: Discount Bancorp, Inc.'s Forms FR Y-9C
Regulatory Capital Ratios- Discount Bancorp, Inc.
2Q16 2015 2014 2013 2012 2011
Tier 1 leverage ratio 9.43% 9.06% 8.02% 7.85% 7.81% 7.43%
Tier 1 risk-based capital ratio 12.91% 12.65% 11.77% 11.61% 12.38% 12.38%
Total risk-based capital ratio 13.93% 13.71% 12.78% 12.62% 13.58% 14.59%
Data Source: Israel Discount Bank of New York's Forms FFIEC 041
Regulatory Capital Ratios- Israel Discount Bank of New York
Israel Discount Bank of New York Page 9 October 19, 2016
Profitability has continued to increase through the first half of 2016, reflecting moderate improvement in
net interest income, the net interest margin (NIM) and greater operating efficiency. A continued
improvement in profitability is expected in the second half of 2016 as these trends continue. The NIM and
overall profitability are still hampered by negative spreads generated on high cost term repo funding.
Particularly in 2017 and 2018, NIM is expected to benefit as a large portion of these repos mature.
Further, any move by the Federal Reserve to increase interest rates would benefit the Bank’s profitability
given the asset-sensitive nature of the balance sheet. Noninterest revenues have also been gradually
increasing and have remained a healthy percentage of the revenue mix at 24% of total revenues. KBRA
expects this trend to continue as management continues to build up the investment management
business.
Key Qualitative Rating Determinants
The qualitative aspects of IDBNY were assessed using a scoring model that focuses on four equally
weighted key factors: market strategy, risk management, liquidity management, and the economic and
regulatory framework. Overall, IDBNY scored in the strong category for qualitative factors using data
obtained from annual reports, earnings statements, management presentations, and regulatory reports.
The following describes KBRA’s qualitative assessment for the Company:
Market Strategy
Business Lines
As one of the first U.S. based foreign bank agencies, IDBNY has an extensive history, over 50 years, in
the New York market. The Bank’s network includes its main office in Manhattan, branches in Staten
Island, Brooklyn, and Short Hills, NJ, in addition to branches in Beverly Hills and downtown Los Angeles,
California; and Aventura, Florida. The Bank also maintains an offshore Grand Cayman Island branch; an
international banking facility at its main office in New York; and representative offices in Chile, Israel,
Mexico, Peru, and Uruguay. Securities brokerage activities are conducted through IDB Capital Corp., a
broker-dealer regulated by the Financial Industry Regulatory Authority and the Securities Exchange
Commission.
IDBNY provides private and commercial banking services to its U.S. and international customers. The
private banking division provides services to high net worth clients and includes a full range of investment
management, trust, brokerage, insurance as well as loans and depository services. Lending and other
credit activities include corporate lending, factoring, commercial real estate lending, asset based lending,
and trade finance. Additional services include cash management, foreign exchange, and interest rate
derivatives. IDBNY is a relationship focused bank with many long-standing customers both domestically
and internationally. Referrals from existing customers are the primary source of new business.
Management Profile and Strategy
The executive management team is very experienced with strong knowledge of customers, industries, and
markets in which IDBNY operates. Further, the management team averages 10 years of experience with
IDBNY, with many having previous experience at other large companies and financial institutions in the
New York market. IDBNY’s U.S. holding company, Discount Bancorp Inc., has its own board of directors
consisting of ten members including the CEO of IDBNY, three members from IDB Ltd. (the group CEO, the
head of the corporate division, and the head of the subsidiaries division), and six independent board
members. Independent board members have extensive financial sector experience.
Israel Discount Bank of New York Page 10 October 19, 2016
In late 2014, IDBNY signed an agreement to transfer all assets and liabilities of its Uruguayan retail bank
(assets: $1.3 billion) to ScotiaBank. This transaction was completed in the fourth quarter of 2015. In
2009, IDBNY established a domestic private banking enterprise which led to the opening of private
banking branches in Staten Island (2010), New Jersey (2013), and Brooklyn (2014). The Bank’s strategy
is to focus on achieving improved profitability through enhanced balance sheet and cost efficiencies as well
as domestic private banking and commercial loan growth, while maintaining and retaining its international
private banking relationships. To that end, IDBNY’s management has set specific strategic goals to be
achieved by 2021.
In pursuit of meeting these strategic goals, the Bank will focus on increasing the loan portfolio through
adding new teams and opening loan production offices, continuing to expand wealth management,
leveraging technology including customer relationship management tools, shrinking the relative size of the
investment portfolio, and expanding its customer base while increasing cross selling and product
opportunities with its existing clients.
The Bank continues to expand its investment management and trust business in an effort to improve its
product offerings and increase the proportion of fee income. Combined assets under management (AUM)
of global portfolio management and domestic investment management and trust is relatively small but
with sizeable growth potential over time given the Bank’s roster of high net worth customers. Combined
AUM grew in 2015 to reach approximately $536 million as of year-end. A key focus in this space has been
growth in assets managed for not-for-profit companies and endowments.
Revenue and Customer Profile
The revenue profile for IBDNY continues to be largely spread-reliant with approximately 76% of revenue
coming from net interest income. Noninterest revenue sources are diverse and include deposit service
charge income, fee income from investment banking and trust services, and trading revenue. Based upon
the longevity of many of the private banking relationships, IDBNY is able to command strong margins on
its investment and trust services. As the AUM base continues to grow, IBDNY expects to benefit from
these strong margins in terms of increased revenues. Of particular focus for growth in the commercial
portfolio are opportunities within the lower-tier middle market space; given the Bank’s relative size and
individualized and specialized approach to servicing and relationship management, IDBNY’s management
feels that the Bank has the capacity to successfully service this segment which has been essentially
abandoned by significantly larger competitors. Given the diversified nature of the commercial loan
portfolio with respect to industry, IDBNY has sufficient expertise to service a wide array of businesses and
industries.
Israel Discount Bank of New York Page 11 October 19, 2016
Overall, IDBNY scores average in market strategy.
Risk Management
KBRA considers IDBNY’s risk appetite to be conservative with a comparatively strong track record of loan
portfolio quality. Nonperforming assets remain at low levels with ample coverage by loan loss reserves.
IDBNY’s charge-off experience is favorable, reflecting conservative underwriting standards focused on
collateral strength combined with personal guarantees from customers typically with considerable financial
resources. For commercial real estate loans, average loan-to-value ratios are conservative (see below)
with solid debt service coverage. To limit interest rate risk, the Bank often employs fixed-to-floating swaps
for its commercial loan structures with Bank of Montreal serving as primary counterparty to the swap
transactions. The Bank also recent implemented new risk-adjusted return on equity (RAROE) tools to
better screen potential lending opportunities more efficiently and effectively.
Risk management practices and procedures are comprehensive. All credits require approval by
independent credit risk management. Approval levels factor in both the internal credit rating and amount
borrowed. All new credits over $10 million (approximately 1% of total regulatory capital) and existing
customers over $15 million require approval by the credit committee chaired by the CEO. Credit exposures
over $35 million (4% of total regulatory capital) require additional approval by the executive committee of
the board of directors. To further limit risk exposure to the Bank, loans exceeding $50 million are typically
participated out with other local institutions; IDNBY has approximately $1.4 billion in participation deals.
The Bank also employs an independent loan review department which typically reviews 40% of the loan
portfolio per year in addition to targeted industry reviews.
The credit portfolio is prudently monitored. Management reviews all watch list, criticized and classified
credits quarterly and conducts monthly meetings to discuss and implement strategies to reduce loans
warranting special attention and review all work-out credits. The chief risk officer leads weekly meetings
to discuss past dues and non-accruals, overdrafts, over lines, and over advances, as well as upcoming
annual credit reviews and line and loan maturities.
The risk management group performs a Dodd-Frank Act stress test (DFAST) compliant stress test
quarterly. In this test, IDBNY well exceeds minimum regulatory requirement in the severely adverse
scenario. Stress testing capabilities compare favorably to typical U.S. banks of IDBNY’s size.
Israel Discount Bank of New York Page 12 October 19, 2016
Overall, IDBNY scores strong in risk management for its favorable track record, comprehensive risk
oversight, corporate governance, and knowledge of customers and markets.
Liquidity Management
The Bank maintains a strong liquidity position with relatively high proportion of liquid assets on its balance
sheet combined with a stable customer deposit base. The bulk of the deposit base consists of customer
deposits from both domestic and international private banking customers and middle market companies.
The customer deposit base is considered stable with many longstanding customers, although private
banking customer balances typically well exceed FDIC insurance coverage limits.
The securities portfolio is low risk with 78% of securities AAA rated, 95% AA- and above, and 99% A- and
above. The vast majority of AAA rated securities are U.S. agency-related MBS with the largest
concentration in GNMA MBS given the favorable treatment of these issues for the Basel III liquidity
coverage ratio (LCR). The Basel III liquidity coverage ratio (LCR), which currently exceeded the 100%
minimum, is calculated on a daily basis. Under Israeli banking regulations, subsidiary banks of Israeli
banks must comply with the LCR. Average duration of the MBS portfolio is 3.8 years and extension risk is
well contained in a rising interest rate scenario.
Overall, IDBNY scores strong in liquidity management for its well-developed liquidity risk framework,
solid customer deposit base, and ample ability to meet short-term liquidity requirements.
Economic and Regulatory Framework
IDBNY operates primarily in the United States, an advanced economy with a developed banking
infrastructure and a relatively good regulatory framework for the banking system. IDBNY is subject to a
comprehensive system of holding company and bank supervision administered by federal and state
regulatory agencies. The holding company is subject to regulation and examination by the FRB, and the
Bank is subject to regulation by the Federal Deposit Insurance Corporation (FDIC) and New York State
banking regulators. Banking institutions continue to adjust and comply with several additional rules and
regulations resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act and the new
Basel III standards. Given the advanced banking infrastructure and strict banking oversight of U.S. federal
and state authorities, IDBNY has a strong score for this factor.
External Support
External support of IDBNY is likely in the event of need from the Bank’s international parent, IDB Ltd.,
given the strategic importance of IDBNY to the group coupled with the fact that it is a wholly-owned
Israel Discount Bank of New York Page 13 October 19, 2016
subsidiary. However, this support is not factored into ratings of IDBNY and its U.S. based holding
company, given their solid standalone financial condition coupled with uncertainty regarding the level of
support allowable by the parent under Israeli banking regulations.
Pursuant to the 2010 Dodd–Frank Act, U.S. regulators are in the process of creating a working resolution
regime for large banks so that their potential failure does not lead to a systemic crisis. However, KBRA
believes that for the foreseeable future, depositories such as the Bank and their uninsured depositors and
creditors will benefit from some degree of extraordinary systemic support. While we do not adjust the
rating to reflect this reality, the fact that the FDIC, when acting as a receiver of a bank, can pay uninsured
depositors and other creditors at its discretion creates the expectation of governmental support. 1
However, KBRA does not foresee any regulatory support being extended to the holding company level.
Outlook
The stable outlook for the long-term ratings reflects the resilience of IDBNY’s capital and earnings to
KBRA’s forward-looking economic stress scenarios.
Drivers of Rating Change
Rating Upgrade
The long-term ratings of the Bank and its U.S. parent share a stable outlook for the mid-term and in
KBRA’s view, a rating upgrade in the near future is not expected. A significant improvement in profitability
over time could lead to an upgrade if combined with the maintenance of favorable asset quality,
comfortable liquidity, and solid capital.
Rating Downgrade
As the Company’s ratings incorporate a certain degree of resilience based upon KBRA’s stress testing, a
rating downgrade in the near term is unlikely. Unexpected deterioration in asset quality or profitability
could lead to a downgrade. In addition, more aggressive lending or capital management could have
negative rating implications. The possibility of this occurring is considered remote given management’s
conservative financial and risk management practices.
1 Statement by Jeffrey M. Lacker, President, Federal Reserve Bank of Richmond before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., June 26, 2013.
Israel Discount Bank of New York Page 14 October 19, 2016
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