Business Context and Reporting Period
Filing: Unaudited Form 10-Q for the quarter and nine months ended September 30, 2015, filed November 6, 2015. The filing identifies the registrant as Community Bank System, Inc.; the request metadata identifies Community Financial System, Inc., which investors should verify.
The company operates community banking, employee benefit services, and wealth management businesses primarily across New York and northern Pennsylvania. The company had 41,099,876 common shares outstanding as of October 31, 2015.
Financial Highlights
| Metric | Three Months Ended September 30, 2015 | Year-to-Date 2015 | Comparable Change |
|---|---|---|---|
| Net income | $25.0 million | $71.2 million | Up 11.9% and 4.3%, respectively |
| Diluted EPS | $0.60 | $1.72 | Up $0.06 and $0.07, respectively |
| Net interest income | $62.4 million | $183.4 million | Up 1.6% and 0.4%, respectively |
| Provision for loan losses | $1.9 million | $3.1 million | Up $0.2 million and down $1.5 million, respectively |
| Noninterest revenue | $31.4 million | $90.2 million | Up 1.0% and 1.2%, respectively |
| Noninterest expense | $56.1 million | $168.1 million | Down 4.6% and 1.1%, respectively |
| Net interest margin | 3.65% | 3.74% | Down 24 and 18 basis points, respectively |
At September 30, 2015, total assets were $8.00 billion, up from $7.49 billion at December 31, 2014. Loans were $4.31 billion, up 1.8% from year-end, and deposits were $6.15 billion, up 3.6%. Available-for-sale securities were $2.87 billion, up from $2.47 billion at year-end.
Total shareholders’ equity was $1.05 billion, compared with $987.9 million at year-end. The Tier 1 leverage ratio was 10.09%, and the net tangible equity-to-assets ratio was 9.14%.
Nine-month operating cash flow was $81.7 million. Investing activities used $465.9 million, principally for purchases of investment securities, while financing activities provided $402.6 million through deposit growth and borrowings. Cash and cash equivalents increased to $156.8 million from $138.4 million at year-end.
External borrowings, including borrowings reported on the balance sheet and subordinated debt, totaled approximately $660.2 million at September 30, 2015. Liquidity included $622 million of unused FHLB borrowing capacity, $1.7 billion of unencumbered securities, and $25 million of unsecured correspondent-bank lines.
Material Changes Versus Prior Comparable Period
- Net income increased primarily because the third quarter of 2014 included a $2.8 million litigation settlement charge. The 2015 quarter included $0.6 million of acquisition-related expenses.
- Net interest income increased despite lower margins, supported by growth in interest-earning assets from organic loan growth and investment purchases.
- Average asset yields declined as new loans and replacement investments carried lower yields. Lower deposit and borrowing costs only partly offset the pressure.
- Employee benefit services revenue increased 5.4% for the quarter and 6.6% year to date, while banking-related fee revenue declined.
- Loans grew across the major portfolios, particularly business lending and consumer installment loans. Deposits shifted toward lower-cost noninterest-bearing and core accounts, while time deposits declined.
- Year-to-date net charge-offs decreased to $2.9 million from $3.7 million, although quarterly net charge-offs increased to $1.6 million from $1.1 million.
- Nonperforming assets were $27.7 million, or 0.64% of loans and OREO, compared with $25.7 million at year-end 2014. The increase was primarily associated with one oil and gas-related business relationship.
Guidance, Outlook, Risks and Unusual Items
- The company expected to complete its acquisition of Oneida Financial Corp. after shareholder approval and anticipated regulatory approvals in the fourth quarter of 2015. The transaction was valued at approximately $142 million in stock and cash and was expected to add 12 branches, approximately $813 million of assets, $397 million of loans, and $708 million of deposits. Additional transaction-related costs were expected during the remainder of 2015.
- The company did not provide formal earnings guidance. Its interest-rate sensitivity analysis estimated a $8.2 million annualized decrease in projected net interest income under a 200-basis-point rate increase and a $0.6 million decrease in a specified flat-rate scenario. Management stated these were hypothetical models, not forecasts.
- Key risks include credit quality, interest-rate sensitivity, liquidity, economic and employment conditions, regulatory and tax changes, technology and cybersecurity, acquisition integration, competition, and litigation.
- Management stated that asset quality remained favorable relative to peer averages, but noted higher quarterly charge-offs, higher nonperforming business loans, and exposure to weak economic conditions and the oil and gas sector.
- Unrealized gains on available-for-sale securities increased accumulated other comprehensive income to $45.9 million. Management concluded that securities with unrealized losses did not have other-than-temporary impairment.
- The company had approximately $749.0 million of commitments and contingencies, consisting of $730.7 million of commitments to extend credit and $18.3 million of standby letters of credit.
- Management considered pending litigation immaterial to consolidated financial position; reasonably possible losses beyond recorded liabilities were estimated at $0 to $1 million in aggregate. The previously recorded $2.8 million class-action settlement remained subject to final court approval.
- Disclosure controls and procedures were reported effective as of September 30, 2015, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Verify the registrant’s identity because the supplied metadata names Community Financial System, Inc., while the filing text names Community Bank System, Inc.
- Verify completion, regulatory approval, consideration, accounting treatment, and integration costs of the planned Oneida Financial acquisition.
- Monitor net interest margin compression, deposit repricing, borrowing costs, and the effect of possible interest-rate increases.
- Review the oil and gas-related credit exposure, nonperforming loan trends, charge-offs, and allowance coverage.
- Assess liquidity after the substantial securities purchases and increased borrowings made ahead of anticipated acquisition-related liquidity.
- Confirm final approval and payment status of the $2.8 million litigation settlement and any additional litigation exposure.
- Reconcile reported diluted EPS and other non-GAAP measures with the audited annual filing and subsequent reports.