Community Bank System, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. The filing identifies the registrant as Community Bank System, Inc.; this differs from the request metadata, which names Community Financial System, Inc. Financial statements are unaudited and presented in accordance with GAAP.
Business Context
The company operates as a community bank serving consumers, businesses and governmental units in New York and northern Pennsylvania. Reportable segments are Banking, Employee Benefit Services and Wealth Management.
- Community Bank, N.A. provides full-service banking.
- Employee Benefit Services includes benefit-plan administration, actuarial and consulting services.
- Wealth Management includes trust, investment, insurance and advisory services.
Financial Performance and Condition
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net income | $23.8 million, versus $23.7 million | $46.1 million, versus $45.9 million |
| Diluted EPS | $0.58, versus $0.57 | $1.12, versus $1.11 |
| Net interest income | $61.2 million, versus $61.2 million | $121.1 million, versus $121.3 million |
| Provision for loan losses | $0.6 million, versus $1.9 million | $1.2 million, versus $2.9 million |
| Noninterest revenues | $29.7 million, versus $29.7 million | $58.8 million, versus $58.0 million |
| Noninterest expenses | $56.0 million, versus $55.2 million | $112.0 million, versus $111.1 million |
- Net interest margin: 3.76% for the second quarter and 3.79% year to date, down from 3.94% for both comparable 2014 periods. Declining asset yields more than offset lower funding costs.
- Assets: $7.91 billion at June 30, 2015, up from $7.49 billion at December 31, 2014.
- Loans: $4.26 billion, up 0.6% from year-end 2014 and 2.8% from June 30, 2014. Business lending increased 3.9% year over year.
- Deposits: $6.09 billion, up from $5.94 billion at year-end 2014. Lower-cost core deposits increased while time deposits declined.
- Investments: Available-for-sale securities totaled $2.82 billion at fair value. The company purchased substantial U.S. Treasury and agency securities in anticipation of liquidity from the pending Oneida transaction.
- Debt and borrowings: Borrowings were $566.2 million, compared with $338.0 million at year-end 2014. Including subordinated debt, external borrowings were approximately $668.3 million at quarter-end.
- Shareholders’ equity: $1.00 billion, compared with $987.9 million at December 31, 2014.
- Capital: Tier 1 leverage ratio was 10.20%, above the 5% regulatory threshold for a well-capitalized institution. Net tangible equity-to-assets was 8.63%.
- Dividends and repurchases: The quarterly dividend was $0.30 per share. The company repurchased 265,230 shares during the first six months under its authorized program and declared $24.4 million of dividends.
Cash Flow and Liquidity
- Operating cash flow was $54.0 million for the first six months, compared with $58.2 million in 2014.
- Investing activities used $406.3 million, primarily because of $448.7 million of available-for-sale securities purchases and $31.2 million of net loan growth.
- Financing activities provided $357.0 million, including $151.6 million of deposit growth and $228.2 million of net borrowing increases.
- Cash and cash equivalents increased to $143.0 million from $138.4 million at year-end 2014.
- Management reported $614 million of unused FHLB borrowing capacity, $1.7 billion of unencumbered securities available for collateralized funding and $25 million of unsecured correspondent-bank credit lines.
- The 30-day and 90-day basic surplus liquidity ratios were 21.5% and 21.4%, respectively, above the company’s 7.5% internal requirement.
Material Changes Versus Prior Comparable Period
- Net income increased 0.7% for the quarter and 0.6% year to date; diluted EPS increased by $0.01 in both periods.
- Loan-loss provisions declined $1.3 million for the quarter and $1.7 million year to date, reflecting lower net charge-offs and stable asset quality.
- Net charge-offs declined to $0.3 million in the quarter and $1.3 million year to date, versus $1.5 million and $2.6 million, respectively, in the prior-year periods.
- Noninterest revenue increased 1.3% year to date, led by 7.2% growth in Employee Benefit Services revenue.
- Expenses increased 1.6% for the quarter and 0.8% year to date. Acquisition expenses were $0.4 million in the quarter and $0.8 million year to date.
- The efficiency ratio worsened to 58.3% for the quarter and 58.8% year to date, compared with 57.0% and 58.1%, respectively.
- Accumulated other comprehensive income declined to $18.7 million from $30.7 million at year-end, mainly because of lower unrealized gains on available-for-sale securities.
Asset Quality, Outlook and Risks
- Nonperforming loans were $23.0 million, or 0.54% of total loans, compared with 0.58% a year earlier. Nonperforming assets were $25.3 million, or 0.59% of loans and OREO.
- The allowance for loan losses was $45.3 million, equal to 1.06% of loans and 197% of nonperforming loans.
- Management stated that asset quality remained stable and favorable relative to peer institutions, but noted continued economic softness, elevated unemployment and prolonged foreclosure timelines affecting consumer mortgage performance.
- The company entered into an agreement to acquire Oneida Financial Corp. for approximately $142 million in cash and company stock. The transaction is expected to close in the fourth quarter of 2015, subject to customary regulatory approvals. It is expected to add 12 branches, approximately $850 million of assets, $390 million of loans and $740 million of deposits. Additional one-time transaction costs are expected.
- No specific earnings or revenue guidance was provided. Interest-rate sensitivity modeling indicated an estimated annualized decrease of $6.7 million in projected net interest income under a 200-basis-point rate increase and a $0.6 million decrease under the modeled zero-rate-change scenario. Management cautioned that these are hypothetical scenarios, not forecasts.
- Key risks include credit quality, interest-rate sensitivity, liquidity, economic conditions, regulatory changes, technology and cybersecurity, acquisition execution, expense control and litigation.
- Pending litigation was not expected to be material to consolidated financial position. Reasonably possible losses beyond recorded liabilities were estimated at $0 to $1 million in aggregate. A $2.8 million automobile-repossession class-action settlement charge had been recorded in the third quarter of 2014; final court approval remained pending.
- Management concluded that disclosure controls were effective as of June 30, 2015, with no material changes in internal control over financial reporting.
Most Important Facts to Verify
- Confirm the registrant identity, because the filing text names Community Bank System, Inc., not Community Financial System, Inc.
- Track regulatory approvals, closing timing, consideration and integration costs for the Oneida Financial acquisition.
- Monitor the effect of lower asset yields and potential rate increases on net interest margin and net interest income.
- Assess whether the increased borrowings used to fund securities purchases remain appropriate as the Oneida transaction progresses.
- Review loan delinquency, nonperforming loans, charge-offs and allowance coverage, particularly in consumer mortgage and business lending portfolios.
- Evaluate the decline in available-for-sale securities’ unrealized gains and related effects on capital and comprehensive income.
- Follow final approval and payment status of the $2.8 million class-action settlement.