Fitch Affirms Community Bank System's Ratings at 'BBB+'; Outlook Stable
KEY RATING DRIVERS
IDRs and VR
Today's affirmation reflects CBU's strong financial performance and stable asset quality throughout various economic cycles due to its conservative strategy and solid execution of its strategic objectives. The Stable Outlook reflects Fitch's view that the bank's consistent performance will continue and that CBU's ratings are well-situated at their current levels for the foreseeable future.
CBU's ratings are supported by its conservative risk appetite and underwriting standards. Fitch believes management has fostered a consistent, conservative culture at the bank which has remained in place over the long term. CBU has stuck to its core competencies and avoided growth in higher risk assets. The bank has also remained focused on its core geographies and has not strayed into syndicated or out of footprint lending. Fitch believes this discipline is the driver behind CBU's track record of credit losses that are below industry and peer averages.
Fitch views CBU's underwriting standards and asset quality track record as superior relative to peers and to some higher rated banks. This is evidenced by CBU's much lower and less volatile net charge off ratio (NCOs) and non-performing asset ratio (NPA) relative to the averages of peers and Fitch rated institutions. Fitch notes that CBU's 40 quarter average NCO ratio is approximately 23bps and its NPAs (inclusive of trouble debt restructurings) to total loans and other real estate owned (OREO) was approximately 59bps at June 30, 2016. Both of these metrics are amongst the best in Fitch's U. S. bank universe. Furthermore, Fitch observes that NPAs peaked at less than 1% during the crisis, well below industry and peer levels.
CBU's profitability has remained consistent in recent years due to its solid asset quality, which has required limited provisioning, good cost control, and a healthy net interest margin (NIM) due to the bank's low funding costs. Earnings have also benefitted from growth in the bank's fee income producing segments which have accounted for 35.7% of revenue in the first two quarters of 2016 compared to 32.5% of revenue in 2015. Fitch notes that this level of fee income is much higher than at other community bank peers.
CBU's return on average assets (ROA) has exceeded 1% since 2010 and has been close to 1.2% over the past 10 quarters. Moreover, Fitch observes that CBU has been able to generate higher than average returns compared to similarly rated banks in Fitch's rated universe over time and has managed to generate them more consistently. The company's 40-quarter average ROA is in excess of 1%, one of the higher levels in Fitch's rated universe with some of the least volatility.
Fitch also notes that CBU's liquidity and funding profile compares favourably to peers. The bank's funding base is comprised almost exclusively of low cost, core deposits, with minimal wholesale funding and a relative low balance of time deposits. In Fitch's view, liquidity is managed conservatively. The bank's loan to deposit (LTD) ratio has hovered around 70% over multiple interest rate and economic cycles, whereas the peer average LTD ratio is closer to 80%. Furthermore, management has kept liquid assets at nearly a quarter of total liabilities. Finally, CBU has a sizable securities portfolio (approximately 33% of total assets) that provides an additionally source of liquidity.
Although CBU's regulatory and risk-based capital ratios are strong relative to similarly rated banks in Fitch's rated universe, historically it has run a lower tangible common equity (TCE) ratio than its peers. However, Fitch views CBU's current levels of capital as adequate for its current rating level and relatively low risk profile.
CBU's ratings remain constrained by its relatively limited geographic footprint, which is concentrated in upstate/central New York and north east Pennsylvania. Like other community banks, this concentration exposes CBU to an idiosyncratic regional economic shock. Additionally, CBU's loan portfolio is concentrated in residential real estate and consumer lending products that make up approximately 70% of the bank's loan portfolio.
SUPPORT RATING AND SUPPORT RATING FLOOR
CBU has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CBU is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.
LONG - AND SHORT-TERM DEPOSIT RATINGS
CBU's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U. S. uninsured deposits benefit from depositor preference. U. S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
HOLDING COMPANY
The IDR and VR of CBU is equalized with its operating company Community Bank, N. A., 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.
RATING SENSITIVITIES
IDRs, VR
Fitch views CBU's current rating as well anchored at their current level and does not anticipate upward rating momentum in the medium term given the company's concentrated company profile, particularly compared to some higher rated financial institutions in Fitch's rated universe. Over the longer term, upward rating momentum could occur should the bank prudently expand its geographic footprint and/or product mix.
Fitch notes that CBU has a relatively higher level of interest rate risk compared to peers due to its higher concentration of longer duration residential mortgage assets. A rapid increase in short - and medium-term rates that results in a material decline in CBU's net interest income could result in a negative credit action. These concerns are somewhat mitigated by CBU's strong deposit market share in rural, less sophisticated markets that should allow management to reasonably lag funding costs and absorb some of the bank's inherent interest rate risk.
As noted above, CBU's investment portfolio comprises approximately 33% of its assets. At 2Q16, it had a duration of around five years, which is a comparatively longer duration than that of many other similar banks in Fitch's rated universe. As such, CBU could be more vulnerable to a rapid and unexpected increase in interest rates, both from an earnings and tangible capital perspective. Negative rating movement could occur if tangible capital decreased by more than 150bps either due to interest rate shocks or from balance sheet growth.
CBU's ratings are also sensitive to the stability of its earnings and asset quality metrics. Although not anticipated, ratings could come under pressure in the event that asset quality deterioration negatively impacts earnings and capital levels.
SUPPORT RATING AND SUPPORT RATING FLOOR
CBU's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
LONG - AND SHORT-TERM DEPOSIT RATINGS
The ratings of long - and short-term deposits issued by CBU and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings could be similarly impacted.
HOLDING COMPANY
If CBU became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.
Fitch has affirmed the following ratings with a Stable Outlook:
Community Bank System, Inc.
--Long-Term IDR at 'BBB+';
--Viability Rating at 'bbb+';
--Short-Term IDR at 'F2';
--Support at '5';
--Support Rating at 'NF'.
Community Bank, NA
--Long-Term IDR at 'BBB+';
--Viability Rating at 'bbb+';
--Long-Term Deposits at 'A-';
--Short-Term Deposits at 'F1';
--Short-Term IDR at 'F2';
--Support at '5';
--Support Rating at 'NF'.
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