Fitch takes rating actions on its community banks group following peer
review
Chicago--(business wire)--fitch ratings has completed a peer review of nine rated community banks. the following banks were reviewed as part of the community banks group: ameriserv financial, inc. (asrv), central pacific financial corp. (cpf), community bank system, inc. (cbu), cvb financial corp. (cvbf), first commonwealth financial corp. (fcf), first interstate bancsystems, inc. (fibk), first midwest bancorp, inc. (fmbi), independent bank corp. (indb), and trustmark corporation (trmk). rating action and rationale: fitch revised ratings and/or outlooks for cpf and trmk. all other ratings and outlooks were affirmed and maintained respectively for the remaining banks. a complete list of rating actions follows at the end of this release. furthermore, for banks that had changes in ratings and/or outlook revisions, please see the separate and related press releases on fitch's web site. cpf's long-term issuer default rating (l-t idr) and viability rating (vr) were upgraded to 'bb+/bb+' from 'bb-/bb-'. at the same time, its short-term idr (s-t idr) was affirmed at 'b'. the outlook remains stable. the action reflects significant asset quality improvement, strong reserves, improved financial performance and removal of its regulatory written agreement. trmk's l-t idr and vr were downgraded to 'bbb+/bbb+' from 'a-/a-', while its s-t idr was also downgraded from 'f1' to 'f2'. the outlook was revised from negative to stable. the downgrade reflects trmk's relatively weaker earning profile relative to others in the community bank group. fitch's community bank peer group is mostly defined by banks with less than $10 billion in assets that typically operate in a limited number of markets and, in general, are conservative, traditional on balance-sheet lenders for local communities. the majority of the group is rated 'bbb-' with the highest rating at 'bbb+'. community banks typically lag the large regional bank peer group by geographic footprint and product/revenue diversification. as such community banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations. the majority of institutions within this group have retail branch networks which reside in contiguously located counties and are typically in just two to three states. fitch believes these factors limit the group's ratings to 'bbb+' and below. those within fitch's community bank group have homogenous business strategies. the institutions are mostly reliant on spread income from loans and investments. on average, non-interest income represents 30% of total revenues within the community bank group while fitch's large regional banks generate over 40% of revenue from non-interest income. with limited opportunity to improve fee-based income in the near term, especially as rates rise and the mortgage refinancing boom ends, fitch expects that community banks will continue to face greater earnings headwinds well into 2014. at the end of third quarter 2012, the average community bank roa for was 0.96% (adjusted for cpf's deferred tax asset allowance reversal), which lags the average roa for large regionals by 18 basis points (bps). fitch also anticipates the group's earnings to continue to lag the large regional peer group as rates rise as balance sheets appear much less asset sensitive based on both quarterly disclosures and regulatory data. fitch views the basel iii final rules published in 3q'13 as a positive for the community bank group. the final rules were generally less onerous than expected regarding unrealized securities gains and losses and their inclusion in the calculation of common equity tier 1 (cet1) for banks less than $250 billion. the final rule also kept the risk weights for residential mortgages consistent with existing practice at, rather than the more punitive treatment originally proposed, providing additional capital relief. fitch generally believes that the community bank group is reasonably capitalized relative to its range of ratings. however, fitch will continue to monitor and potentially take action on banks that manage capital at more aggressive levels, especially in light of earnings profiles that have not fully recovered and above average loan growth. fitch observes that asset quality continues to improve throughout the banking sector. the community bank group is no exception. both nonperforming assets (npas) and net charge-offs (ncos) are down materially year over year albeit at a slower pace than coming out of the crisis. fitch anticipates further asset quality improvement as nonperforming loan (npl) inflow slows. however, fitch observes commercial and industrial (c&i) loan growth has been significant over the last year within the community bank group. fitch believes that while credit quality within this space has been solid over recent periods, loss rates should normalize over the near term, potentially creating a drag on earnings momentum and capital. the community bank group's funding profile is considered a rating strength providing a stable source of liquidity as core deposits are stable and sticky. although community banks are not typically price leaders for either loans or deposits, most hold good market positions in their respective footprints. such examples would be trmk and fibk which typically hold the 1, 2 or 3 rank positions in their operating footprint. nonetheless, fitch believes that the groups' market share positions could be challenged should loan demand pick and competition for deposits intensifies, particularly under a rising rate scenario. for more information on fitch's community bank peer group, please see the forthcoming special report to be published over the next couple of weeks. key rating drivers and sensitivities - idrs and vrs asrv the affirmation of ameriserv financials (asrv) ratings and outlook reflects its stable asset quality and earnings metrics. the bank has consistently reported above average credit quality with non-performing assets totalling to 0.66% of total loans plus oreo. regulatory capital ratios remain in excess of well capitalized levels. however, with an efficiency ratio of over 85%, asrv has the weakest earnings profile of the community bank peer group. profitability is challenged by the bank's higher cost, organized labor force and a lack of scale. asrv is the smallest bank in fitch's community bank peer group with assets totalling $1 billion at the end of the second quarter. the bank also has above average concentrations in non-owner occupied commercial real estate with over 37.5% of total loans and 184% of tier 1 capital plus loan loss reserves in commercial investment properties. should the company reduce its existing expense base and improve earnings while generating economies of scale, positive rating actions could ensue. conversely, should loan growth in riskier asset classes increase or asset quality deteriorate, negative rating actions could ensue. cpf fitch upgraded the long-term idr of central pacific financial corp. (cpf) and its bank subsidiary to 'bb+' from 'bb-' on sept. 20, 2013 due to faster than anticipated reductions of problem loans without taking sizeable credit losses. the ratings upgrade also reflects significant strong reserves, improved financial performance and removal of its regulatory written agreement. see related press release 'fitch details rationale on upgrade of central pacific's idr to 'bb+' on community bank peer review' (dated sept. 23, 2013) for more detailed discussion. cbu the affirmation of community bank system, inc.'s (cbu) ratings and stable outlook reflects its strong profitability relative to its peer group, sound asset quality and stable nim. cbu's roa averaged ~1.10% over the past five quarters and is stronger than its peer group mean. despite the challenging interest rate environment, cbu also maintained a healthy average nim which has hovered around 3.8% over past five quarters, and is generally stronger than its peer group average of 3.6%. cbu maintains good asset quality with npas and ncos amongst the lowest in its peer group. npas were 0.81% at june 30, 2013, much less than peer group average of 2.49%. cbu's ratings have limited upward mobility, primarily due to its lower tce ratio relative to peers. cbu's tce ratio of 7.01% at june 30th, 2013 is still relatively low compared to its peer group which had an average tce ratio of 8.82% at june 30, 2013. although fitch acknowledges cbu's lower than peer level balance sheet risks, it believes a higher, loss-absorbing tce ratio would need to be achieved before positive ratings migrations occur. cvbf the affirmation of cvb financial corp.'s (cvbf) ratings and stable outlook reflects the company's strong earnings and capital profiles relative to peers. cvbf continues to post strong roas, and maintains a strong lead in the community bank peer group. in addition to its strong earnings profile, cvbf also managed tangible and risk-adjusted capital at high levels, while keeping its net charge-off ratio nominal. these buffers are deemed adequate to offset any unexpected credit losses owing to the banks concentrations in terms of geography (southern ca) and loan type (cre secured). fitch believes there is limited further upside rating momentum over the intermediate term. however, better portfolio and business diversity, as well as continued improvement in earnings and credit trends could have positive implications. negative rating pressures could result if asset quality deteriorates, or if capital is more aggressively managed absent changes to asset quality or earnings. fcf the affirmation of first commonwealth financial's (fcf) ratings and stable outlook reflects its relatively strong funding profile, capital position, and asset quality compared to fitch's community banking peers. the bank's ratings are constrained by weak profitability metrics and higher risk credit concentrations. the bank's 2q'13 earnings were challenged by sizeable losses taken on the clean-up of a large legacy loan and the sale of another troubled loan. while these losses underscore fcf's legacy overconcentration risk, fcf's ratings and outlook incorporate these exposures. the recently reported asset losses are offset by the bank's overall strength relative to similarly 'bbb-' rated peers. although some volatility is expected to continue given these legacy concentrations, fitch's ratings reflect the expectation that credit quality has largely stabilized. should asset quality metrics continue to deteriorate or capital levels become challenged due to aggressive capital management or increased credit losses, negative rating actions could ensue. conversely, positive rating action could ensue if the bank successfully improves its profitability and reduces its credit concentration risks. fibk the affirmation of first interstate bancsystems, inc.'s (fibk) ratings and the stable outlook reflects fitch's view of the bank's sustained dominant market share, its consistent earnings profile and continued asset quality improvement while it maintains adequate capital levels for its rating and risk profile. npas as a percentage of loans and oreo have decreased sequentially each quarter since mid-2010, falling to 3.53% at 2q'13. however, fitch expects npas to remain elevated in both historical terms and relative to fibk's community bank peer group, constraining its rating at its current level. while the bank's ytd roa exceeds 1.0%, fitch observes that its provision expense through 2q13 is over $22 million less than is was through the first half of 2012, adding roughly 40 bps after-tax to its roa. fitch views fibk's capital levels as adequate for its current rating level and expects excess capital to be used for acquisition purposes over the near-to-mid-term. given fibk's geographic concentration and continued elevated npas, little rating upside is expected in the near term. furthermore, fitch's view of asset quality gradually improving is incorporated into fibk's current rating level. however, to the extent that management is able maintain core earnings and align the company's performance to higher rated peers, while augmenting capital, fitch could take positive rating action over the long term. fmbi the affirmation of first midwest bancorp, inc.'s (fmbi) ratings and stable outlook reflects improved credit metrics due primarily to a large bulk npa sale toward the end of 2012 as well financial performance in line with expectations and solid capital measures. fitch notes that while the company's npa ratio has fallen nearly 190 bps since 2q'12, relative to other, higher rated peers, npas remain above average within the peer group. earnings performance is in-line with 'bbb-' peers. bottom line results have stabilized post-bulk asset sale with an roa under 80bps even with the aid of pre-tax reserve releases adding between 10 - 15 bps over the last three quarters. fitch expects that earnings will remain in the 75 bps to 90 bps roa range over the near-to-mid-term as fmbi's efficiency ratio levels out and margin compression continues in this low rate environment. fitch observes that core capital ratios (tce) have remained fairly stable since fitch's last review and remain relatively average within the community bank peer group. fitch generally views fmbi's current rating as well-situated at its current level. however, to the extent that the bank begins exhibiting adverse credit trends within growing product lines such as its c&i or agriculture books and outside of fitch's expectations, negative rating action could ensue. furthermore, while fitch believes that m&a activity within the community bank peer group is inevitable, fitch would likely re-evaluate fmbi's ratings for either positive or negative rating action if it takes on a sizable merger depending on the pricing of the deal, the ensuing capital levels post-merger and the post-merger efficiencies realized. finally, fitch observes that fmbi has a relatively larger portion of its securities book in municipal securities compared to others in the peer group. while the company has historically experienced no losses related to this book, material volatility in the municipal bond market resulting in wider spreads and a growing level of unrealized losses could result in negative rating action. indb the affirmation of independent bank corp.'s (indb) ratings reflects the company's low levels of npas and ncos, which compare favourably against its community bank peers, stable operating performance, as measured through roa, which has remained stable through the cycle, and healthy nim. indb's npas at 2q'13 were 1.85% compared to peer group average of 2.69%, and ncos continue to remain low. the ratings continue to be constrained by concentration of cre in indb's loan portfolio (which accounts for over half of indb's loan book), and a home equity portfolio which has experienced ~40% growth since 2010 and currently accounts for 18% of the loan book. additionally, as a result of acquisition of central bank corp, inc. (cebk), capital has come under pressure with tce at 6.72% at 2q13 compared to 7.04%% 3q'12. nonetheless, fitch anticipates capital rebuild to more normalized levels in the medium term given the strong earnings profile, which is a healthy mix of spread and fee based income. indb's liquidity profile continues to be weaker than its community bank peers. indb reports an average loan-to-deposit ratio of almost 100%, which is higher than the peer group average of 80%. although, contingent sources of liquidity include fhlb advances, federal reserve borrowings; repurchase lines and a parent company line of credit, fitch would positively view an enhanced liquidity profile. fitch positively views indb's deposit market share in markets considered core to indb. the current ratings are at the high end of their likely range, and the likelihood for a positive rating action is limited given the company's capital levels. the negative rating outlook reflects the possibility of a negative ratings action if capital levels do not improve, further deterioration in the liquidity profile occurs, or asset quality materially worsens. trmk the downgrade of trustmark corporation's (trmk) ratings reflects the issuer's weaker earnings profile and lower capital levels. offsetting these factors is leading market share in trmk's home state and incremental expansion in the florida market given its recent banctrust financial group (bftg) acquisition. the outlook was also revised to stable from negative. please see the accompanying press release for additional information on this rating action: 'fitch details rating rationale on downgrade of trmk's idr to 'bbb+' following community bank review' (dated sept. 23, 2013). key rating drivers and sensitivities - support rating and support rating floor all of the community banks in the peer group have support ratings of '5' and support floor rating of 'nf'. in fitch's view, the community banks are not systemically important and therefore, fitch believes the probability of support is unlikely. idrs do not incorporate any support for the community bank peer group. key rating drivers and sensitivities- subordinated debt and other hybrid securities subordinated debt and hybrid capital instruments issued by the community banks are notched down from the issuers' vrs in accordance with fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. the ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' vrs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation. subsidiary and affiliated company key rating drivers and sensitivities all of the entities reviewed in the community bank group factor in a high probability of support from parent institutions to its subsidiaries. this reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. it also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults. fitch has affirmed the following ratings with a stable outlook: ameriserv financial, inc. --long-term idr at 'bb'; --short-term idr at 'b'; --viability rating at 'bb'; --support rating at '5'; --support floor at 'nf'. ameriserv financial bank --long-term idr at 'bb'; --long-term deposits at 'bb+'; --short-term idr at 'b'; --short-term deposits at 'b'; --viability rating at 'bb'; --support rating at '5'; --support floor at 'nf'. ameriserv capital trust i --preferred at 'b-'. community bank system, inc. --long-term idr at 'bbb'; --short-term idr at 'f2'; --viability rating at 'bbb'; --support at '5'; --support floor at 'nf'. community bank, n.a. --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' cvb financial corp. --long-term idr at 'bbb'; --viability rating at 'bbb'; --short-term idr at 'f2'; --support floor at 'nf'; --support at '5'. citizens business bank --long-term idr at 'bbb'; --long-term deposit at 'bbb+'; --viability rating to at 'bbb'; --short-term idr at 'f2'; --short-term deposit at 'f2'; --support floor at 'nf'; --support at '5'. cvb statutory trust iii --preferred stock at 'bb-' first commonwealth financial corp. --long-term idr at 'bbb-'; --short-term idr at 'f3'; --viability rating at 'bbb-'; --support floor at 'nf' --support at '5'. first commonwealth bank --long-term idr at 'bbb-'; --long-term deposit at 'bbb''; --short-term idr at 'f3'; --viability rating at 'bbb-'; --short-term deposit at 'f2'; --support floor at 'nf'; --support at '5'. first interstate bancsystems, inc. --long-term idr at 'bbb-'; --short-term idr at 'f3'; --viability rating at 'bbb-'; --support floor at 'nf'; --support '5'. first interstate bank --long-term idr at 'bbb-'; --long-term deposit at 'bbb'; --short-term idr at 'f3'; --short-term deposit 'f2'; --viability rating at 'bbb-'; --support floor at 'nf'; --support '5'. first midwest bancorp, inc. --long-term idr at 'bbb-'; --short-term idr at 'f3'; --viability rating at 'bbb-'; --senior unsecured at 'bbb-'; --subordinated debt at 'bb+'; --support '5'; --support floor 'nf'. first midwest bank --long-term idr at 'bbb-'; --short-term idr at 'f3'; --long-term deposits at 'bbb'; --short-term deposits at 'f3'. --viability rating at 'bbb-'; --support '5'; --support floor 'nf'. first midwest capital trust i --preferred stock at 'b+'. fitch has affirmed the following ratings with a negative outlook: independent bank corp. --long-term idr at 'bbb'; --short-term idr at 'f2'; --viability rating at 'bbb'; --support rating at '5'; --support rating floor at 'nf'. rockland trust company --long-term idr at 'bbb'; --short-term idr at 'f2'; --viability rating at 'bbb'; --support rating at '5'; --support rating floor at 'nf'; --long-term deposits at 'bbb+'; --short-term deposits at 'f2'. fitch has upgraded the following ratings with a stable outlook: central pacific financial corp. --long-term idr to 'bb+' from 'bb-'; --viability rating to 'bb+' from 'bb-' central pacific bank --long-term idr to 'bb+' from 'bb-'; --long-term deposits to 'bbb-' from 'bb'; --viability rating to 'bb+' from 'bb-'. cpb capital trust i, ii & iv cpb statutory trust iii & v --trust preferred securities to 'bb-' from 'cc' fitch has downgraded the following ratings with a stable outlook: trustmark corporation --long-term idr to 'bbb+' from 'a-; --short-term idr to 'f2' from 'f1'; --viability to 'bbb+' from 'a-'. trustmark national bank --long-term idr to 'bbb+' from 'a-'; --short-term idr to 'f2' from 'f1'; --long-term deposits to 'a-' from 'a'; --short-term deposits to 'f2' from 'f1' --subordinated debt to 'bbb' from 'bbb+; --viability to 'bbb+' from 'a-. the outlook was revised to stable from negative fitch has affirmed the following ratings: central pacific financial corp. --short-term idr at 'b' --support rating floor at 'nf'; --support at '5'. central pacific bank --short-term idr at 'b' --short-term deposits at 'b' --support rating floor at 'nf'; --support rating at '5'. trustmark corporation --support floor at 'nf'. --support at '5'. trustmark national bank --support floor at 'nf' --support at '5'. additional information is available at www.fitchratings.com. in addition to the source(s) of information identified in fitch's master criteria, these actions were additionally informed by information provided by the companies. applicable criteria and related research: --'global financial institutions rating criteria' (aug. 15, 2012); --'rating fi subsidiaries and holding companies' (aug. 10, 2012); --'assessing and rating bank subordinated and hybrid securities' (dec. 05, 2012) --'u.s. banking quarterly review: 2q13 (record net income in no-growth environment)' (august 16, 2013) --'u.s. banks: liquidity and deposit funding (diminishing qe effectiveness and its impact on systemic liquidity and funding)' (aug. 8, 2013); --'u.s. bank mergers and acquisitions' -- when will the catalysts kick in? (july 11, 2013) --'u.s. banks: interest rate risks (what happens when rates rise)' (june 18, 2013) --'u.s. banks: community bank review (pressures likely to persist)' (june 13, 2013) --'u.s. banks -- home equity reset risk hitting the reset button in 2014' (april 29, 2013) --'u.s. banks: rationalizing the branch network (witness the incredible shrinking branch network)' (sept. 17, 2012); --'treatment of unrealized losses in u.s. bank capital rule proposal (pro-cyclical capital policy to create greater capital volatility for banks)' (aug. 7, 2012); --'risk radar' (sept. 5, 2013). applicable criteria and related research: global financial institutions rating criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181 rating fi subsidiaries and holding companies http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209 assessing and rating bank subordinated and hybrid securities http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542 u.s. banks: liquidity and deposit funding http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196 u.s. bank mergers and acquisitions -- when will the catalysts kick in? http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539 u.s. banks: interest rate risks (what happens when rates rise) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875 u.s. banks: community bank review (pressures likely to persist) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709836 u.s. banks -- home equity reset risk hitting the reset button in 2014 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706915 u.s. banks: rationalizing the branch network (witness the incredible shrinking branch network) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330 treatment of unrealized losses in u.s. bank capital rule proposal (pro-cyclical capital policy to create greater capital volatility for banks) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638 risk radar http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656769 additional disclosure solicitation status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802876 all fitch credit ratings are subject to certain limitations and disclaimers. please read these limitations and disclaimers by following this link: http://fitchratings.com/understandingcreditratings. in addition, rating definitions and the terms of use of such ratings are available on the agency's public website 'www.fitchratings.com'. published ratings, criteria and methodologies are available from this site at all times. fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'code of conduct' section of this site. fitch may have provided another permissible service to the rated entity or its related third parties. details of this service for ratings for which the lead analyst is based in an eu-registered entity can be found on the entity summary page for this issuer on the fitch website.
