Community Bank System, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, filed November 9, 2011. Community Bank System operates primarily as a community bank through Community Bank, N.A., serving consumers, businesses and governmental units in New York and Northern Pennsylvania, with additional employee-benefit, wealth-management and related financial services businesses.
The filing identifies the registrant as Community Bank System, Inc.; this differs from the company name in the request metadata.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net income | $20.0 million, up 16% | $54.2 million, up 14% |
| Diluted EPS | $0.54, versus $0.51 | $1.50, versus $1.42 |
| Net interest income | $54.6 million, up 18% | $154.3 million, up 14% |
| Provision for loan losses | $1.0 million, versus $1.4 million | $3.1 million, versus $5.3 million |
| Noninterest income | $23.2 million, up 1.3% | $66.8 million, down 0.3% |
| Operating expenses | $48.1 million, up 8.4% | $142.5 million, up 7.4% |
- Net interest margin was 4.04% for the quarter, down four basis points year over year, and 4.08% year to date, up four basis points.
- The reported efficiency ratio improved to 57.0% for the quarter and 57.8% year to date, compared with 57.9% and 59.1%, respectively.
- Total assets were $6.50 billion at September 30, 2011, up from $5.44 billion at December 31, 2010.
- Loans were $3.48 billion, up 15% from year-end 2010; total deposits were $4.84 billion, up 23%.
- Shareholders’ equity was $755.6 million, compared with $607.3 million at year-end 2010. The increase included acquisition-related stock issuance, retained earnings and higher accumulated other comprehensive income, partly offset by dividends.
- Cash and cash equivalents increased to $425.9 million from $211.8 million at year-end 2010.
- Net cash provided by operating activities was $80.6 million. Investing activities provided $42.4 million, and financing activities provided $91.1 million, producing a $214.0 million increase in cash.
- Borrowings were broadly unchanged at approximately $728.3 million, while subordinated debt held by unconsolidated subsidiary trusts was $102.0 million.
- The Tier 1 leverage ratio was 8.17%, above the 5% regulatory threshold for “well-capitalized” institutions cited by management. The net tangible equity-to-assets ratio was 6.79%.
Material changes versus prior comparable periods
- On April 8, 2011, the company acquired The Wilber Corporation for approximately $103 million, consisting of $20.4 million in cash and 3.35 million common shares. The acquisition added 22 branches, approximately $462 million of loans, $297 million of investment securities and $772 million of deposits.
- The Wilber transaction increased assets, loans, deposits, interest-earning assets and operating expenses. Acquisition and integration expenses were $0.4 million in the third quarter and $4.7 million year to date.
- Excluding acquisition expenses, management stated that nine-month net income increased approximately 21% and diluted EPS increased approximately 12% from the prior-year period.
- Net interest income benefited from balance-sheet growth and lower funding costs, although third-quarter asset yields and the net interest margin declined because of low market rates, lower investment yields and increased low-yield cash balances.
- Year-to-date noninterest income was slightly lower because of reduced deposit service fees and mortgage-banking revenue. Benefit-plan and wealth-management revenue increased.
- Net charge-offs declined to $1.1 million in the third quarter from $1.4 million in the prior-year quarter. The quarterly net charge-off ratio was 0.13%, compared with 0.18%.
- Nonperforming loans were $18.8 million, or 0.54% of loans, compared with 0.58% one year earlier. Nonperforming assets were $21.6 million, or 0.62% of loans and other real estate.
- The allowance for loan losses was $42.5 million, representing 1.22% of total loans and 226% of nonperforming loans.
- Accumulated other comprehensive income increased to $23.4 million, largely because of unrealized gains on available-for-sale securities. The company also recorded a significant pension-related actuarial loss following the merger and revaluation of the Wilber retirement plan.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide formal earnings guidance in the filing. It expects the pending acquisition of CAI Benefits, subject to customary closing conditions, to add more than $4 million of service revenue in 2012.
- Management described asset quality as stable and favorable relative to peer averages, but noted weak economic conditions, soft commercial-loan demand, high unemployment and continued pressure on consumer borrowing and home-equity utilization.
- The company held $47.0 million of pooled trust-preferred securities with $21.5 million of unrealized losses. Management concluded that no other-than-temporary impairment existed, but noted that further deterioration in collateral performance or market conditions could change that conclusion.
- Liquidity appeared strong at quarter-end: cash and cash equivalents were $426 million, additional Federal Home Loan Bank capacity was approximately $420 million, unencumbered securities were approximately $1.1 billion, and unsecured correspondent-bank lines were $65 million. The reported 30-day and 90-day basic surplus ratios were 19.6% and 19.5%, above the 7.5% internal minimum.
- Interest-rate sensitivity modeling indicated projected annualized net interest income would be approximately $1.7 million higher under a 200-basis-point rising-rate scenario and approximately $1.0 million lower under the company’s flat-rate scenario. Management cautioned that these are hypothetical estimates, not forecasts.
- Key risks include credit quality, interest-rate and liquidity risk, economic conditions, regulatory and legislative changes, acquisition integration, technology implementation, competition, expense control, tax matters, litigation and changes in customer behavior.
- Management stated that pending and threatened litigation is not expected to have a material effect on consolidated financial position or results of operations. No material change to previously disclosed risk factors was reported.
- Disclosure controls and procedures were assessed as effective as of September 30, 2011, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Verify the financial contribution, integration costs and credit marks associated with the Wilber acquisition, including the remaining fair-value marks on acquired loans.
- Assess whether net interest margin pressure from low rates and excess cash balances offsets continued loan and deposit growth.
- Monitor nonperforming loans, delinquency trends, charge-offs and the adequacy of the allowance, particularly in acquired business loans and consumer portfolios.
- Review the valuation and credit performance of the pooled trust-preferred securities and the potential effect of changing market or collateral conditions.
- Confirm the timing and terms of the proposed CAI Benefits acquisition and whether the anticipated 2012 revenue contribution is realized.
- Evaluate pension funding and actuarial assumptions following the $17 million additional unamortized actuarial loss related to the Wilber plan merger.
- Reconcile liquidity capacity, capital ratios and borrowing levels under stressed funding and interest-rate scenarios.