Fitch Upgrades Community Bank System Inc.'s Ratings to 'BBB+'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded Community Bank System Inc.'s (CBU) Long-term Issuer Default Rating

(L-T IDR) and Viability Rating (VR) to 'BBB+/bbb+' from 'BBB'/bbb' today following a review of Fitch's Community Bank Peer Group. CBU's Short-term IDR was affirmed at 'F2'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRS and VR

Today's upgrade reflects CBU's consistently strong financial performance throughout various economic cycles due to a conservative strategy and sound execution. The Stable Outlook reflects Fitch's view that ratings are well-situated at current levels for the foreseeable future.

CBU's ratings are supported by its conservative risk appetite and underwriting standards. CBU has stuck to its core competencies and avoided growth in higher risk assets such as subprime residential or construction and development loans leading up to the financial crisis and has also demonstrated restraint in growing disproportionately indirect auto and commercial and industrial (C&I) lending. Fitch recognizes that this helped CBU to maintain credit losses below industry averages.

Fitch views CBU's underwriting standards as superior relative to peers, to some higher rated banks within Fitch's rated universe, and to the banking industry as a whole. This is evidenced by a much lower and less volatile (as measured by a lower standard deviation) net charge off ratio (NCOs) through the last business cycle when compared to industry averages and Fitch rated institutions. Fitch notes that CBU's 40 quarter average NCO ratio is approximately 25bps, well below other higher Fitch rated banks, including some that operate in a similar operating footprint (upstate NY, mid-Atlantic) as CBU.

This credit performance relative to peers is also evident in the company's non-performing asset (NPA) ratios. At 2Q15, CBU's NPAs (inclusive of accruing troubled debt restructurings or TDRs) to total loans and other real estate owned (OREO) was approximately 0.60%, one of the lowest levels in Fitch's U.S. bank universe. Furthermore, Fitch observes that NPAs peaked at under 1% during the crisis, well below industry and peers.

CBU's profitability has remained consistent in recent years due in part to its good asset quality metrics (noted above) which has only necessitated minimal provisioning. Earnings have also benefitted from CBU's ancillary business lines that have continued to generate good returns. Return on average assets (ROA) has exceeded 1% since 2010 and was over 1.20% through the half of 2015. 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. 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 30% 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.

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 solidly positioned at their current level and would not expect further upward rating momentum given the company's geographic concentration and more concentrated company profile, particularly compared to some higher rated financial institutions in Fitch's rated universe.

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 30% of its assets. At 2Q15, 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.

That said, today's action incorporates some expected tangible capital volatility due to swings in other unrealized gains and losses. To the extent that the TCE ratio declines by more than 100 basis points, Fitch could review ratings to determine if a negative rating action was appropriate.

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.

The rating actions are as follows:

Fitch has upgraded the following ratings with a Stable Outlook:

Community Bank System, Inc.

--Long-Term IDR to 'BBB+' from 'BBB';

--Viability Rating to 'bbb+' from 'bbb';

Community Bank, NA

--Long-Term IDR to 'BBB+' from 'BBB';

--Viability Rating to 'bbb+' from 'bbb';

--Long-Term Deposits to 'A-' from 'BBB+';

--Short-Term Deposits to 'F1' from 'F2';

Fitch has affirmed the following ratings:

Community Bank System, Inc.

--Short-Term IDR at 'F2';

--Support at '5';

--Support Rating at 'NF'.

Community Bank, NA

--Short-Term IDR at 'F2';

--Support at '5';

--Support Rating at 'NF'.

Additional information is available on www.fitchratings.com

Related Research:

--'U.S. Banking Quarterly: 2Q15' (July 2015);

--'U.S. Basel III and Dodd Frank Act Regulatory Guide' (November 2014);

--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)' (November 2014);

--'U.S. Banks: Implications of an Interest Rate Shock Scenario' (October 2014);

--'U.S. Banks: Liquidity and Deposit Funding' (August 2013);

--'U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?' (July 2013).

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Related Research

2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809228

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

U.S. Banking Quarterly Comment: 2Q15 (Inflection Point in Margins?)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869054

U.S. Banks: Implications of an Interest Rate Shock Scenario

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=800748

U.S. Banks: Liquidity and Deposit Funding

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

U.S. Basel III and Dodd Frank Act Regulatory Guide (Applicability of New Bank Regulations in the U.S.)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=798848

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991080

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991080

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150921006145/en/

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA
Director
+1 312-368-3153
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Doriana Gamboa
Senior Director
+1 212-908-0865
or
Committee Chairperson
Justin Fuller, CFA
Senior Director
+1 312-368-2057
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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