September 5, 2017 / 9:18 PM / in a year

Fitch Completes Annual U.S. Large Community Bank Peer Review

(The following statement was released by the rating agency) NEW YORK, September 05 (Fitch) Fitch Ratings has completed its annual peer review of five rated U.S. large community banks. The following banks were reviewed as part of Fitch's Large Community Bank Peer Group: Central Pacific Financial Corp. (CPF), Community Bank System, Inc. (CBU), CVB Financial Corp. (CVBF), First Midwest Bancorp, Inc. (FMBI), and Independent Bank Corp. (INDB). Fitch revised the Rating Outlook of CVBF to Positive from Stable. All other ratings and Outlooks were affirmed and maintained for the remaining banks in the peer group. For a complete list of rating actions, please see the individual related press releases published for each bank listed above available at CVBF's Long-Term Issuer Default Rating (IDR) and Viability Rating (VR) were affirmed at 'BBB/bbb' and its Short-Term IDR was affirmed at 'F2'. The Rating Outlook was revised to Positive from Stable. The Outlook revision reflects Fitch's view that over time CVBF's strong earnings performance may warrant a higher rating if CVBF maintains its disciplined growth and capital management strategy while demonstrating asset quality performance in line with higher rated peers. Fitch's Large Community Bank Peer Group is mostly defined by banks with near or less than $10 billion in assets that typically operate in a limited number of geographic markets and product segments. As such, community banks are generally more susceptible to idiosyncratic risks such as a regional economic shock or the default of a large borrower. In general, these banks are conservative, traditional on-balance-sheet lenders for local communities, with limited fee-based business lines, resulting in relatively narrow business models. Fitch believes these factors generally result in ratings in the 'BBB' category. Large community banks tend to have business models that are quite reliant on spread income from lending and investments. Most large community banks have non-interest income below 25% of total revenues while larger banks often generate more than 35% of revenue from non-interest income. As a result, Fitch believes large community banks may be at risk for weaker earnings performance in a rising rate environment if depositor behavior deviates from modelling assumptions and funding costs rise further than expected. This risk could be elevated if loan demand picks up and larger banks subject to the liquidity coverage ratio escalate price competition for retail depositors. A flattening yield curve environment also presents risks for large community banks, many of which hold a higher proportion of long-duration, fixed-rate assets than larger banks. Despite these risks, Fitch believes the earnings profiles in the large community bank peer group are relatively solid. Return on average assets over the past five quarters has been above 1% on average, stronger than the mid-tier regional peer group. Earnings continue to benefit from low levels of loan loss provisioning, as asset quality remains benign. Moving forward, Fitch expects some added earnings pressure from higher provisioning, as asset quality is likely to revert to longer-term historical averages. Fitch expects merger and acquisition (M&A) activity to remain elevated among banks approaching $10 billion in assets. Fitch believes deal activity will be driven by the desire to offset the additional regulatory expenses and lost debit card interchange revenue associated with crossing $10 billion with additional scale benefits. Recent examples of this activity include FMBI's purchase of Standard Bancshares and CBU's purchase of Merchants Bancshares. Similar to the mid-tier regional peer group, Fitch remains concerned by outsized loan growth by large community banks, which has been in excess of broader industry averages and long-term sustainable levels. Loan growth above underlying economic growth can indicate a build-up of potential risks, loosened underwriting standards, or expansion into new products or markets. In Fitch's view, this level of growth remains a key credit constraint for the large community banking sector. In particular, loan growth in the commercial real estate, construction, multifamily, and home equity loan categories has been quite elevated for large community banks relative to the overall industry. Fitch considers the large community bank group's funding profile a ratings strength. Banks in the group have sizable, low-cost core deposit bases, which Fitch believes provide a stable source of liquidity. Although community banks are not typically price leaders for either loans or deposits, most hold good market positions in their respective footprints. The banks also use very limited amounts of wholesale and non-core funding while investing excess liquidity conservatively in high-quality securities and cash. Fitch believes the peer group is reasonably well capitalized relative to its range of ratings and balance sheet risk. The average Common Equity Tier 1 (CET1) ratio for the peer group was 12.6% at 2Q17, though capital management varies within the group. Contact: Christopher Van Bell Associate Director +1-212-908-0777 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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