COMMUNITY BANK SYSTEM, INC.
Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) for
The Rating Outlook on the Long-Term IDRs is Negative. A full list of rating actions is below.
Key Rating Drivers
CBU's ratings reflect its diversified business model for a bank its size, stable asset quality and solid deposit franchise, which offers ample low-cost core deposits that support earnings. The Negative Outlook recognizes the bank's levels of organic loan growth significantly above historical levels, which if sustained, could signal a higher risk appetite.
Differentiated Business Model: CBU's ratings are supported by its business model, which is somewhat unique for a bank its size, with considerable revenue diversity derived from its non-banking businesses. This helps the bank achieve a proportion of non-interest income near 40%. These fee businesses also tend to be stable over time and give the bank reach outside its branch footprint. Fitch views this diversity in CBU's business as a key point of differentiation, which supports the overall rating.
Growth Remains Elevated: CBU has historically been judicious in pursuing growth, supplementing modest organic growth with regular acquisitions. The more recent cadence of acquisitions has slowed, and has been replaced with robust organic loan growth, which has averaged 13% for the last two years. While the bank has taken advantage of favorable market dynamics, Fitch nonetheless, views this higher growth cautiously, and expects growth to moderate lower. If growth is sustained at these higher levels, Fitch would view this as a more permanent shift in the bank's risk appetite.
CBU's longer-duration investment portfolio remains more sensitive to interest rate risk, and potential losses in the event that the bank needed to sell a portion of the portfolio, although this is outside of Fitch's base case expectation.
Asset Quality Stable: Asset quality metrics remain stable and in line with historical metrics, with the bank's ratio of impaired loans of 0.56% in 2023, below its four-year average of 0.64% and slightly below the peer median of 0.58%. Likewise, realized losses remain low with net charge-offs of 0.09%, below its four-year average of 0.10%, supported by a stable in-footprint regional economy. Fitch views some deterioration, in line with historical levels, as likely, as credit conditions continue to normalize.
While supported by the bank's historically low charge-offs, CBU's allowance for loan losses remains lower than peers. Additionally, Fitch views the
Profitability Remains Above Peers: Despite the
A key component is the bank's greater revenue diversity, with its proportion of non-interest income to total revenue of 38% in 2023, significantly better than the peer median of 24%. Fitch expects profitability to remain better than peers in 2024.
Capital Remains Adequate: Regulatory capital levels have historically been among the highest of the mid-tier peer group. At 14.8% as of 4Q23 the bank's CET1 ratio remains significantly above the peer median of 10.9% and is likely to remain higher than peers. However, tangible capital as measured by tangible common equity to tangible assets (TCE) remains the lowest of the peer set, as unrealized losses in the bank's securities portfolio have weighted heavily on the ratio.
Improvement in AOCI and hence TCE, will largely depend on the direction of interest rates. While Fitch currently expects the Fed to cut the policy rate by 75bps in 2H24, the bank remains sensitive to unexpected rate increases or events that would necessitate the sale of securities that would trigger realized losses. Fitch expects CBU's tangible capital levels to remain more sensitive than peers.
Solid Deposit Franchise: CBU continues to benefit from strong market share within the rural markets where it operates, giving the bank a stable source of low-cost, core deposits. The bank is likely to continue to outperform peers on deposit costs, with a very low realized deposit beta of 20% in the current cycle. At 75% at YE23, CBU's loan-to-deposit ratio remained in line with pre-pandemic levels and notably better than the peer median of 88%. While on-balance sheet liquidity is lower than peers, the bank has access to contingent funding, notably in excess of uninsured deposits.
Holding Company: The IDR and VR of CBU are equalized with those of its operating company CBNA, reflecting its role as a bank holding company, which is mandated in the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Organic loan growth sustained at levels notably above historical levels would signal a higher risk appetite and could result in a ratings downgrade;
A disposition of securities triggering realized losses that lowered the bank's CET1 ratio in line with lower rated peers, would likely result in negative rating action, absent a credible plan to increase capital. Similarly, a decline in the TCE ratio below 4%, would likely trigger a downgrade;
Fitch would be sensitive to any large acquisition that fundamentally changes the risk appetite/profile of the company, or depress tangible capital levels;
Fitch views CBU's fee businesses, particularly the BPAS unit, as a key point of differentiation and supportive of the bank's rating. Fitch would be sensitive to any strategic or structural changes that would materially diminish BPAS' fee business contribution to earnings;
Should CBU begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch down the holding company IDR and VR from the ratings of the operating companies.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch believes CBU's concentration in rural markets in Upstate and central
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
CBNA's Long-Term uninsured deposit rating is rated one notch higher than the bank's IDR and senior unsecured debt because
Government Support: CBU's and CBNA's Government Support Ratings (GSRs) are rated 'No Support' (ns). In Fitch's view the probability of support is unlikely.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The Long-Term deposit rating is sensitive to any change to CBNA's Long- Term IDRs. The short-term deposit rating is sensitive to any change in the long-term deposit rating and Fitch's assessment of CBU's funding and liquidity profile.
Government Support Ratings: GSRs would be sensitive to any change in
VR ADJUSTMENTS
The Business Profile score of 'a-' has been assigned above its implied 'bbb' category score due to the following adjustment reason: business model (positive).
The Asset Quality score of 'a-' has been assigned below its implied 'aa' category score due to the following adjustment reason: concentrations (negative).
The Capitalization & Leverage score of 'bbb+' has been assigned below the implied 'a' category score due to the following adjustment reason: Core Capital Calculation (negative).
The Funding and liquidity score of 'a-' has been assigned below its implied 'aa' category score due to the following adjustment reason: future and historical metrics (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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