COMMUNITY FINANCIAL SYSTEM, INC. quarterly report, Q3 FY2022

Community Bank System, Inc. (CBU) — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2022; filed November 9, 2022. The source filing identifies the registrant as Community Bank System, Inc.; this differs from the request metadata, which names Community Financial System, Inc. The interim financial statements are unaudited.

Business Context

The company operates diversified financial services businesses through banking, employee benefit services, insurance, wealth management and related subsidiaries. Community Bank, N.A. provides banking services primarily in the Northeast. On May 13, 2022, the company acquired Elmira Savings Bank for $82.2 million in cash, adding approximately $579.0 million of identifiable assets, $437.0 million of loans, $522.3 million of deposits and $45.8 million of preliminary goodwill.

Financial Performance and Position

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net interest income	$110.4 million	$92.6 million	$308.4 million	$278.7 million
Provision for credit losses	$5.1 million	$(0.9) million	$12.0 million	$(11.0) million
Noninterest revenues	$65.2 million	$64.3 million	$195.0 million	$182.3 million
Noninterest expenses	$108.2 million	$100.4 million	$318.4 million	$287.2 million
Net income	$48.7 million	$45.3 million	$135.6 million	$146.1 million
Diluted EPS	$0.90	$0.83	$2.49	$2.68
Net interest margin	3.03%	2.74%	2.88%	2.85%

Q3 net income increased 7.4%, while nine-month net income declined 7.2%. Diluted EPS increased $0.07 in Q3 but declined $0.19 year to date.
Adjusted pre-tax, pre-provision net revenue was $67.9 million in Q3 and $190.1 million year to date, increases of 20.1% and 9.4%, respectively.
The efficiency ratio improved to 59.3% in Q3 from 61.7%, and was 60.0% year to date versus 60.1%.
Total assets were $15.59 billion at September 30, 2022, compared with $15.55 billion at December 31, 2021.
Gross loans were $8.54 billion, up 15.9% from year-end 2021. Total deposits were $13.49 billion, up 4.5% from year-end.
Available-for-sale securities had a fair value of $5.17 billion and net unrealized losses of approximately $966.4 million at September 30, 2022, primarily attributable to higher interest rates.
Total shareholders’ equity declined to $1.46 billion from $2.10 billion at year-end 2021, primarily because of $695.8 million of after-tax other comprehensive loss related to securities.
The allowance for credit losses was $60.4 million, or 0.71% of total loans, compared with 0.68% at year-end 2021. Net charge-offs were $0.4 million in Q3 and $1.3 million year to date.
Regulatory capital ratios remained above well-capitalized requirements. The company’s Tier 1 leverage ratio was 8.78%; the bank’s was 7.03%.
Cash and cash equivalents were $247.4 million. Additional reported liquidity included $1.76 billion of unused FHLB capacity, $487.7 million of Federal Reserve discount-window availability, $2.57 billion of unencumbered securities and $25.0 million of unsecured correspondent-bank lines.
Operating cash flow was $143.0 million for the first nine months, compared with $153.0 million in the prior-year period. Investing activities used $1.89 billion, primarily for securities purchases and loan growth.

Material Changes Versus Prior Comparable Period

Net interest income benefited from higher interest-earning asset yields and balances. Q3 net interest margin increased 29 basis points, while year-to-date margin increased 3 basis points.
Noninterest revenue increased modestly in Q3 and 7.0% year to date. Insurance revenue grew materially, while employee benefit and wealth management revenue faced market-related pressure in Q3.
Credit-loss expense shifted from releases in 2021 to provisions in 2022 because of loan growth and weaker economic forecasts. The Elmira acquisition contributed $3.9 million of acquisition-related credit-loss provision.
Noninterest expenses rose 7.7% in Q3 and 10.9% year to date, reflecting personnel, technology, marketing, operating-franchise expansion and acquisition costs.
The investment portfolio expanded, while cash equivalents declined substantially as the company shifted assets into higher-yielding securities and loans.
Nonperforming and delinquent loan ratios improved, with nonaccrual loans at 0.33% of total loans versus 0.57% at year-end 2021 and 0.91% a year earlier.
The quarterly dividend increased from $0.43 to $0.44 per share. The company repurchased 250,000 shares under its 2022 authorization during the first nine months.

Outlook, Risks and Unusual Items

Management expects continued loan and deposit growth but notes competitive lending conditions, inflation, supply-chain constraints, rising interest rates and potentially weaker economic growth.
Management’s credit-loss forecasts incorporate deterioration in GDP growth, vehicle values, residential real estate and household income. Future provisions may increase if economic or collateral conditions weaken.
The investment portfolio’s significant unrealized losses reduce reported tangible equity and create interest-rate sensitivity, although management does not believe the losses represent credit losses and does not expect to sell the securities before recovery.
The company’s interest-rate model indicated projected 12-month net interest income would decline by 0.7% under a 100-basis-point increase, 1.8% under a 300-basis-point increase and 2.1% under a 300-basis-point decrease, based on stated assumptions. These scenarios are not forecasts.
Acquisition-related items included $4.7 million of acquisition expenses, a $0.4 million contingent-consideration adjustment and the $3.9 million Elmira credit-loss provision during the first nine months.
Pending litigation was not expected to be material to financial position. The estimated aggregate range of reasonably possible losses beyond recorded liabilities was $0 to $1 million, although the outcome could affect a future reporting period.
The company stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. No material change to previously disclosed risk factors was reported.

Investor Verification Items

Confirm the registrant identity and ticker because the filing text states Community Bank System, Inc., while the request metadata states Community Financial System, Inc.
Reconcile the substantial decline in tangible equity and the $966.4 million securities-related unrealized loss with regulatory capital measures and future interest-rate exposure.
Monitor deposit pricing, overnight borrowings and net interest margin as rates and funding costs change.
Evaluate the sustainability of loan growth, the Elmira integration, acquisition synergies and related goodwill and intangible balances.
Track allowance coverage, delinquency trends, nonaccrual loans and credit-loss provisions under changing economic forecasts.
Assess fee-income sensitivity to equity and bond markets, particularly employee benefit, wealth management and insurance-related businesses.
Review the company’s non-GAAP measures alongside GAAP results, including the effects of acquisition costs, purchase accounting, loan accretion and credit-loss adjustments.