Fitch takes rating actions on its community bank group following peer
review
New york--(business wire)--fitch ratings has completed a peer review of 10 rated community banks. the community bank peer review resulted in the affirmation and stable outlook of eight banks and the affirmation and negative outlook for two banks. a complete list of rating actions is provided at the end of this release. the following banks were reviewed as part of the community banks group: ameriserv financial, inc. (asrv), central pacific financial corp. (cpfc), community bank system, inc. (cbu), cvb financial corp. (cvb), first commonwealth financial corp. (fcf), first interstate bancsystems, inc. (fibk), first midwest bancorp, inc. (fmbi), independent bank corp. (indb), old national bancorp (onb), trustmark corporation (trmk). the majority of this peer group is rated 'bbb' with a stable rating outlook. 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. rating drivers and sensitivities - vrs and idrs (applicable to all banks in the community bank group) fitch-rated community banks viability ratings (vrs) and issuer default ratings (idrs) incorporate limiting rating factors. the company's vrs and idrs are significantly more sensitive to the economic conditions within their respective footprints given their geographic concentration. additionally, community banks' earnings profile is much more reliant on spread revenue with limited opportunities to improve fee-based income. fitch also notes that community banks' loan mix is heavily weighted towards real estate lending, particularly commercial real estate, when compared to larger peer groups. fitch's outlook for community banks is trending negative. in general, the banking industry is facing significant challenges given the weak economic picture, the prolonged low rate environment, increased burden from regulatory-related costs and impacts from dodd-frank. however, in fitch's view, these issues may impact community banks much more than global trading banks, national banks and large regionals, which are more diversified, benefit from economies of scale and are typically price leaders in their operating markets. in fitch's opinion, the community bank group business model will likely come under pressure. moreover, rising fixed costs related to increased regulation and reporting, and aspects of dodd-frank which may affect consumer lending practices, corporate governance coupled with increased capital and liquidity requirements stemming from basel iii, are factors that will likely lead to lower returns over time. fitch notes that community banks may need to enhance compliance and risk management functions to measure with the increased standards for risk modeling and regulatory reporting. in general, community banks are operating with excess liquidity given weak loan demand. cashflows are being reinvested in lower yield assets from both securities portfolio and new loans being originated at lower rates. at this point, most banks have remained conservative in terms of increasing duration and/or credit risk in their investment securities portfolio. however, this rate environment may push banks to reach for yield or extend duration in order to improve spread income. fitch continues to assess any changes in risk appetite in the investment securities book. fitch is also concerned with the recent growth rates in commercial and industrial lending (c&i) across the banking industry, particularly at a time when competition is fierce given weak loan demand. as banks reassess their risk profile and capital allocation, many are lowering cre exposure and shifted focus to grow c&i loans. some community banks have not historically focused on c&i and their lending platforms may need to improve to support such growth plans. this also could potentially lead to adverse borrower selection. to date, fitch has not seen credit trends in c&i to suggest credit deterioration is looming, however, anecdotally banks have alluded to aggressive competition in terms of price and structure. fitch believes merger & acquisition (m&a) activity will increase for community banks over the next several years. according to fdic data, the number of community banks accounts for 98% of the banking system, but only 20% of total industry assets. in fitch's opinion, management teams at smaller companies may have more of an incentive to consider m&a as a way to increase economies of scale and enhance geographic and product diversity, which may help offset the present challenges. strengths: community bank'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, fibk, onb, which typically hold the 1, 2 or 3 rank position in their operating footprint when reviewed by msa. nonetheless, community banks market share positions may be squeezed should loan demand pick and competition for deposits intensifies, particularly under a rising rate scenario. . fitch views community banks' simplistic balance sheet as another positive attribute. they experience minimal earnings volatility and financials are transparent and less complex. these banks are less susceptible to negative impacts from market volatility given their focus on traditional types of lending. further, the more manageable organizational structure bodes well for controlling risk profile and appetite for most community banks. fitch-rated community banks have experienced good credit performance despite their cre concentrations. during the real estate downturn, credit losses are reportedly better than larger banks, excluding those concentrated in markets where the housing sector experienced significant stress (i.e. ca, fl, az, nv, mi, oh, ga). net charge-offs (ncos) peaked at 2.00% for this group in 2010, which is lower than larger competitors (large regionals peaked at 2.62% in 2009 and mid-tier regionals peaked at 2.20% in 2009). in fitch's view, current ncos levels are approaching normalized levels for community banks, with the second quarter of 2012 (2q'12), ncos on average 0.77% compared to a 10-year average of 0.69%. weaknesses: fitch believes the prolonged low rate environment and flat yield curve will continue to pressure earnings. although true for all banks, fitch believes community banks will be disproportionately affected owing to the lack of revenue diversity and their reliance on spread income. for fitch-rated community banks, average noninterest income ratio stood at 26% at 2q'12 versus 46% for national banks, 36.4% large regionals and 33.8% for mid-tier regionals. fitch also notes that community bank's loan mix is heavily weighted towards real estate lending, particularly commercial real estate, when compared to larger peer groups. prior to 2008, smaller banks bulked up on cre as they lost business to bigger banks in other traditional products such as auto loans, home mortgages, and credit cards. as such, community bank's loan mix reflects a higher risk profile given cre concentration that still exists. real estate accounts for an average of 70% of total loans with cre (including construction and development) averaging roughly 40% of total loans down slightly from peak of 42% in 2007. fitch also considers the improved capital positions of community banks relative to cre exposure as appropriate given the higher risk profile. cre (which includes construction loans) to total equity totaled 218% in 2q'12 versus 304% in 2007. future capital positions may be pressured given regulators changes to the definition of capital. u.s. banking regulators recent notice of proposed rulemaking (npr) implementing basel iii anticipates that these requirements would apply equally to all banks, regardless of size. most notable in the proposals would be the treatment of unrealized gains and losses in other comprehensive income, which could greatly increase the volatility of a bank's regulatory capital measure, which if sustained, would require community banks to hold additional capital over minimum requirements to account for this volatility. further, fitch also believes that community bank's access to the capital markets may be a challenge in the future given limited products suited for banks of this size. rating drivers and sensitivities for the idrs and vrs of each bank are summarized below: asrv (l-t idr 'bb', outlook stable) asrv's affirmation and stable outlook reflects its stable asset quality and earnings metrics. however, with an efficiency ratio of over 85% driving pre-provision net revenues (ppnr) of less than 1%, the company has the weakest earnings profile of the peer group. the modest level of profitability is attributable to an organized labor force and a lack of scale as the bank has only $1 billion in assets, which also makes it the smallest bank in fitch's community bank peer group. should the company maintain its existing expense base while generating scale in a reasonable manner, positive rating actions could ensue. conversely, should capital maintenance or loan growth become significantly more aggressive, current ratings could be pressured. cpfc (l-t idr 'bb-', outlook stable) cpfc's affirmation of its current rating and stable outlook is driven by asset quality and operating performance in line with fitch's expectations. the institution has shown significant asset quality improvement in the past year, which is embodied in the current rating, which was upgraded in may of 2012. most notably, central pacific continues to reduce exposure to its legacy mainland exposure and c&d portfolios. while cpfc is expected to remain profitable, headwinds still exist as the institution faces nim pressure and high overhead costs. future financial performance should continue to benefit from negative provisions in the near term. however, ppnr still lags community bank peers. positively, capital ratios are solid with a fitch calculated tangible common equity ratio of 10.8% and ranked the highest for the community banks group. fitch considers this appropriate given the cpfc also has the highest level of npas (which includes restructured loans and 90+ past dues) at 8% when compared to peers. cbu (l-t idr 'bbb', outlook stable) cbu's affirmation and stable outlook reflects the company's strong profitability relative to its peer group, sound asset quality and stable nim. cbu's roa averaged 1.19% over the past five quarters and compares better than its peer group mean of 1.10% over the same period. despite the challenging interest rate environment, cbu also maintained a healthy average nim which has hovered around 4% over past five quarters and last three years, and is generally stronger than its peer group average of 3.82%. cbu maintains good asset quality with npas and ncos amongst the lowest in its peer group. npas were 1% at june 30, 2012 and far exceeded the peer group average of 3.54%. cbu's ratings have limited upward mobility, primarily due to its tce ratio relative to peers, as well by its small franchise given its community bank business profile. although the tce ratio of 7.74% at june 30, 2012 has seen improvements of 165 basis points (bps) year-over-year, it is still below average compared to its peer group which had an average tce ratio of 8.99% at june 30, 2012. fitch believes a higher tce ratio would need to be achieved before a rating action could occur. cvb (l-t idr 'bbb', outlook stable) cvb's affirmation and stable outlook is supported by the company's strong earnings and capital profiles relative to peers. the company has reported strong financial measures through the most recent cycle while maintaining a solid level of tangible capital levels. these buffers are deemed adequate to offset any unexpected credit losses owing to the bank's geographic concentrations (southern ca) and loan type (cre secured). above all else, the affirmation reflects fitch's opinion of credit culture at cvb as the bank was able to show consistent profitability over the cycle in the face of an incredibly weak credit environment in its operating footprint. should capital maintenance become more aggressive or asset quality weaken negative rating actions would ensue. positive rating actions could occur as the bank diversifies away from cre lending and reduces its reliance on spread income. fcf (l-t idr 'bbb-', outlook stable) fcf's rating affirmation and stable outlook is supported by the company's strong capital position relative to peers along with its improving credit fundamentals. also incorporated in fcf's idr is its weaker earnings and credit profiles over the cycle compared to community bank peers. the management team and board of directors have experienced significant change in recent years, culminating with the termination of the company's ceo in december 2011. should the new management team be able to achieve better performance from both an earnings and credit standpoint, positive rating action could follow. conversely, a more aggressive approach to capital management and/or credit trends that reverse their current positive trajectory may lead to negative rating action. fibk (l-t idr 'bbb-', outlook stable) fibk's ratings are affirmed and stable outlook is maintained. while fibk enjoys dominant deposit market share in wyoming, montana and south dakota financial performance trails others in the community bank peer group due to weaker loan pricing power and lingering asset quality issues that have forced fibk to maintain an elevated level of provisions quarter to quarter. fibk's roa of 69 bps at 2q'12 is consistent with historical performance but lags the community bank peer group mean by 25-30 bps. in fitch's view, fibk's roa is aided by a strong core, low cost deposit base. loss of this cheap funding could put adverse pressure on fibk's ratings. further, while asset quality trends have been improving over the past five quarters, npas remain elevated, especially in relation to peer, at 5.35% of gross loans + oreo. if positive asset quality trends do not continue or if npas fall strictly due to large levels of charge-offs, negative rating action could be taken. fitch also notes that fibk's capital position is relatively thin compared to others within the community bank peer group especially in light of elevated problem loans. given fitch's expectations that asset quality trends should improve and capital ratios should continue to be augmented through earnings retention and nominal balance sheet growth, a stable outlook is maintained. fmbi (l-t idr 'bbb-', outlook stable) fmbi's ratings affirmation and stable outlook reflects stabilization of asset quality, financial performance in line with expectations and solid capital measures. earnings performance as well as credit measures are in-line with 'bbb-' peers. presently, core revenue stream is stable with an average ppnr/average assets of about 1.46% over the last five quarters. the company's earnings base also provides absorption for its higher provisioning needs. also incorporated in current rating and outlook is the view that credit challenges may persist. in fitch's view, some volatility should be expected given the cre concentration (about 52% of loans and roughly 300% of total equity). fitch also notes that fmbi is operating with higher level of npls when compared to community bank peers. ratings could be positively affected if fmbi's earnings were to improve and pull in line with peer average coupled with a reduction in npas and diversified loan mix. the outlook may be revised to negative should capital base materially decline from its present levels absent improvements in credit trends and risk profile and/or a significant decline in core revenue. indb (l-t idr 'bbb', outlook negative) indb's rating affirmation reflects the company's strong asset quality, as evidenced by the low levels of npas and ncos relative to other fitch-rated community banks. the ratings also continue to be supported by indb's stable operating performance, as measured through roa and nim, both of which are in line or above peer averages. 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 34% growth since 2010 and currently accounts for 20% of the loan book. the revision of the rating outlook to negative from stable not only reflects the aforementioned industry issues, but also indb's pro forma tangible capital position in relation to its peers. indb's tce and tier 1 rbc measures are among the weakest relative to other community banks rated by fitch. while the company has historically managed its tce in the 6%-7% range, fitch believes such low levels of tangible capital leave less room than peers for any potential deterioration in asset quality. however, fitch notes that indb's credit measures have consistently outperformed most of its peers. as a result of indb's announcement to acquire central bank corp, inc. (cebk), the tce ratio is expected to decline to 6.28% from 6.99% actual 1q'12 levels. in fitch's view, indb's liquidity profile may limit the company's financial flexibility under more stressful market conditions, in relation to peers. indb reported a 98% loan-to-deposit ratio at june 30, 2012, which is higher than the peer group average of 80%. furthermore, the company has relatively smaller investment securities portfolio, which accounts for 10% of total assets. onb (l-t idr 'bbb', outlook stable) onb's idr affirmation reflects the company's solid level of earnings relative to the community bank peer group and its maintenance of solid capital levels through period of growth and acquisitions. the stable outlook reflects fitch's view that modest improvements in earnings should be realized as asset quality issues relating to the monroe bancorp acquisition subside and efficiencies are found during the integration of newly acquired institutions. fitch notes that onb's earnings performance is in line with similarly rated banks. through 2q'12, onb generated an roa of 1.14%, a marked increase compared to 2q'11 at 0.83% and fiscal year-end (fye) 2011 at 0.86%. driving improved performance is the benefit from purchase accounting discounts related to the acquisitions of monroe bancorp and integra bank (fdic-assisted) along with lower provisioning for loan losses, partially offset by modestly higher operating expenses. fitch expects earnings to be flat with the possibility of slight improvement in efficiencies. further, onb's margin should continue its improvement as higher cost time deposits roll off onb's balance sheet and are replaced with lower cost funds. fitch also notes that asset quality, which deteriorated following the acquisition of monroe bancorp, has stabilized and positions onb comfortably amongst the other 'bbb' rated institutions within its peer group. total ncos for the company were 0.24% at 2q'12, down from 0.41% at 2q'11 and 0.49% at fye 2011. while npas appear to be elevated compared to peer, it should be noted that onb has approximately $406 million in fdic-covered assets, $160 million of which are nonperforming. trmk (l-t idr 'a-', outlook negative) the affirmation of trmk at 'a-' reflects the company's strong earnings profile, consistency of performance, and leading market share in its home state of mississippi. despite a challenging interest rate environment, trmk has maintained a strong nim in excess of 4% over the past several years. trmk's higher relative rating, compared to the community bank group, also reflects its solid liquidity profile, strong capital position, and diversified loan book. fitch notes that trmk's asset quality deteriorated during the crisis, mainly reflecting its florida exposure, but ncos have remained very manageable. notwithstanding these strengths, fitch revised the rating outlook to negative from stable in may 2012 after trmk announced the planned acquisition of banctrust financial group (btfg). the transaction is estimated by fitch to result in an approximate 250 bps decline in capital ratios. the pricing on the deal was also considered aggressive given btfg's weak financial condition. in the event the transaction is completed, the likelihood of a downgrade is considered high. the combination of a pro forma capital base that will now be approximately 100 bps lower than the community bank peer average according to fitch, and an earnings profile that is forecasted by fitch to no longer be well above peer averages contribute to an increased likelihood of downgrade. in the event the transaction is not finalized, fitch would expect to see progress in returning its earnings profile to pre-financial crisis levels in order to maintain the rating at 'a-', a rating that is above the community bank peer average rating. rating drivers and sensitivities - support rating and support floor rating 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 and vrs do not incorporate any support for the community bank peer group. subordinated debt and other hybrid securities subordinated debt and hybrid capital instruments issued by the 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. following fitch's criteria, trust preferred securities are notched down from the vrs by two for loss severity and down two for non-performance for most trust preferred securities. holding company rating drivers and sensitivities all of the entities reviewed in the community bank group have a bank holding company (bhcs) structure with the bank as the main subsidiary. all subsidiaries are considered core to parent holding company supporting equalized ratings between bank subsidiaries and bank holding companies. idrs and vrs are equalized with those of its operating companies and banks 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. double leverage is below 120% for all the parent companies reviewed in this peer group. subsidiary and affiliated company 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 issuer default rating (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-'. central pacific financial corp. --long-term idr at 'bb-'; --short-term idr 'b'; --viability rating at 'bb-; --support rating floor at 'nf'; --support affirmed at '5'. central pacific 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 floor at 'nf'; --support rating at '5'. cpb capital trust i, ii & iv cpb statutory trust iii & v --trust preferred securities at 'c'. 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'; --short-term idr at 'f2'; --viability rating at 'bbb'; --support floor at 'nf'; --support at '5'; citizens business bank --long-term idr at 'bbb'; --long-term deposit at 'bbb+'; --short-term idr at 'f2'; --short-term deposit at 'f2'; --viability rating at 'bbb'; --support floor at 'nf'; --support at '5'. cvb statutory ii and 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 commonwealth capital trust --preferred stock at 'b+'. 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+'. old national bancorp --long-term idr at 'bbb'; --short-term idr at 'f2'; --viability rating at 'bbb'; --support floor at 'nf'; --support '5' old national bank --long-term idr at 'bbb'; --short-term idr at 'f2'; --long-term deposit at 'bbb+'; --short-term deposit 'f2'; --viability rating at 'bbb'; --support floor at 'nf'; --support '5'. st. joseph capital trust i and ii --preferred stock at 'bb-'. fitch has affirmed the following ratings with a negative outlook: trustmark corporation --long-term idr at 'a-'; --short-term idr at 'f1'; --viability rating at 'a-'; --support at '5'; --support floor at 'nf'. trustmark national bank --long-term idr at 'a-'; --short-term idr at 'f1'; --long-term deposits at 'a'; --short-term deposits at 'f1'; --subordinated debt at 'bbb+'; --viability rating at 'a-'; --support at '5'; --support floor at 'nf' fitch has affirmed the following ratings and revised the outlook to negative from stable: 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'. additional information is available at www.fitchratings.com .the ratings for old national bancorp, old national bank and st. joseph capital i and ii were unsolicited and have been provided by fitch as a service to investors. all other ratings above were solicited by, or on behalf of, the issuer, and therefore, fitch has been compensated for the provision of the ratings. 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: --'u.s. banks: rationalizing the branch network (witness the incredible shrinking branch network)' (sept. 17, 2012); --'u.s. banks: mortgage representations and warranties (banks increase reserves; uncertainty remains)' (aug. 20, 2012); --'global financial institutions rating criteria' (aug. 15, 2012); --'rating fi subsidiaries and holding companies' (aug. 10, 2012); --'risk radar' (oct. 15, 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); --'rating bank regulatory capital and similar securities' (dec. 15, 2011). applicable criteria and related research: 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 u.s. banks: mortgage representations and warranties (banks increase reserves; uncertainty remains) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684038 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 risk radar october 2012 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691996 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 rating bank regulatory capital and similar securities http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656371 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.
