CHICAGO--(BUSINESS WIRE)--Fitch Ratings has completed a peer review of seven rated community banks. The following banks were reviewed as part of the Community Banks Group: Central Pacific Financial Corp. (CPF), Community Bank System, Inc. (CBU), CVB Financial Corp. (CVBF), First Commonwealth Financial Corp. (FCF), First Midwest Bancorp, Inc. (FMBI), Independent Bank Corp. (INDB), and Trustmark Corporation (TRMK).
Fitch revised the Rating Outlook for INDB. All other ratings and Outlooks were affirmed and maintained respectively for the remaining banks. A complete list of rating actions is provided at the end of this release. Furthermore, please see the separate and related press releases for each bank listed above.
INDB's long-term Issuer Default Rating (IDR) and Viability Rating (VR) were affirmed at 'BBB/bbb'. At the same time, the Outlook was revised to Stable from Negative. The Stable Outlook reflects Fitch's view that liquidity levels will be maintained at reasonable levels going forward and that growth (both organic and acquisitions) will be measured against the backdrop of adequate capital levels.
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. Most of the banks within the group fall in the 'BBB' category with the highest rating at 'BBB+'.
Community banks typically lag larger peer groups 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 less than 30% of total revenues within the community bank group while larger banks generate over 40% of revenue from non-interest income. With limited opportunity to improve fee-based income in the near term. Fitch expects that community banks will continue to face greater core earnings headwinds well into 2015. Through the first half of 2014, the average community bank return on assets (ROA) was 0.90%, which lags the average ROA for large regionals by 17 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. For those that disclose net interest income sensitivity in a +200 bps environment, the community bank group averages about just over 2.71% in expansion. The average large regional bank averages net interest income expansion of 5.9% in the same environment.
Fitch observes that asset quality continues to improve within the community banks group. 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 remains concerned about the smaller banks' exposure to C&I lending, as this generally represents a relatively new asset class and some institutions may not have the requisite back-office infrastructure or experience to adequately identify, monitor and mitigate any ensuing credit risk.
Fitch observes that community banks have historically focused on real estate lending but have felt the need to diversify loan portfolios after taking large losses associated with heavy commercial real estate concentrations. While Fitch generally views loan portfolio diversification (by both asset class and geography) a positive for banks, growth C&I lending is viewed with caution, especially given current interest rate levels and the amount of competition surrounding this lending space. Moreover, Fitch observes that the long-term NCO rate for C&I lending is 97 bps based on FDIC data. This compares unfavourably to almost all real estate lending classes outside of construction and development.
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 in light of relatively weak earnings profiles and above average loan growth.
Relating to capital management, Fitch expects community bank merger and acquisition (M&A) activity in 2014 to exceed 2013 in light of the growing competitive pressure felt by the smallest institutions. The number of small bank M&A transactions where the target bank was less than $1 billion in assets and the acquirer was over $2.5 billion but under $10 billion rose to 41 in 2013 from 23 in 2012, according to data provided by Highline Financial. Through nearly the first nine months of 2014, there have been 35 deals announced.
Fitch believes that regulatory exhaustion and an inability to improve returns on equity have led many banks with assets under $1 billion to sell, particularly as transaction multiples have improved. Moreover, Fitch expected community bank deals to continue to outpace those deals of larger institutions given the apparent regulatory-related difficulty in closing transactions.
Fitch also believes some in the group will continue to buy branches of larger institutions looking to exit more remote and/or noncore markets. Over the past couple of years, CBU has purchased branches from HSBC, USA and Bank of America (BAC) in separate deals. FMBI recently closed on the purchase of 12 branches from Popular, Inc. in Chicago, a market Fitch considers to be bifurcated and competitive.
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 CBU which typically hold the 1, 2 or 3 rank position 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 and with larger banks needing to comply with the liquidity coverage ratio (LCR).
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.
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 (Jan. 31, 2014)';
--'Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012)';
--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014)';
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014)';
--'U.S. Banking Quarterly Comment: 2Q14 (July 2014)';
--'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: 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' (April 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
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 Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107
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 -- 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 Global 1Q14
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560
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