SEC Form 10-Q Summary
Filing entity: Community Bank System, Inc. (the supplied metadata identifies Community Financial System, Inc.; investors should verify the issuer name). The unaudited report covers the three and nine months ended September 30, 2021, with comparisons to September 30, 2020 and balance-sheet comparisons to December 31, 2020.
Business context and reporting period
The company operates a diversified financial-services business comprising Banking, Employee Benefit Services, and All Other activities, including insurance and wealth management. Community Bank, N.A. serves customers across Upstate New York, Northeastern Pennsylvania, Vermont, and Western Massachusetts, while employee-benefit and insurance businesses operate nationally and in additional regional markets.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Net interest income | $92.6 million | $93.0 million | $278.7 million | $275.0 million |
| Noninterest revenues | $64.3 million | $59.7 million | $182.3 million | $171.2 million |
| Noninterest expenses | $100.4 million | $97.0 million | $287.2 million | $281.5 million |
| Net income | $45.3 million | $42.8 million | $146.1 million | $118.2 million |
| Diluted EPS | $0.83 | $0.79 | $2.68 | $2.22 |
| Net interest margin | 2.74% | 3.12% | 2.85% | 3.36% |
| Provision for credit losses | $(0.9) million benefit | $1.9 million expense | $(11.0) million benefit | $17.3 million expense |
- Third-quarter net income increased 5.9%; year-to-date net income increased 23.6%.
- Noninterest revenues increased 7.8% in the quarter and 6.5% year to date, led by employee benefit, wealth management, and insurance services.
- Operating expenses excluding acquisition expenses and litigation accruals increased 7.7% in the quarter and 4.8% year to date. The efficiency ratio was 61.7% for Q3 and 60.1% year to date, compared with 58.9% and 59.2%, respectively.
- Allowance for credit losses on loans was $49.5 million, or 0.68% of loans, versus 0.87% at September 30, 2020 and 0.82% at December 31, 2020.
- Loans totaled $7.28 billion, down 1.8% from year-end 2020 and 2.4% from September 2020, mainly because PPP loans were forgiven. Deposits totaled $12.72 billion, up 13.4% from year-end 2020.
- Total assets were $15.33 billion, compared with $13.93 billion at December 31, 2020. Shareholders’ equity was $2.07 billion, down from $2.10 billion, primarily because of accumulated unrealized losses on available-for-sale securities.
- Cash and cash equivalents were $2.32 billion. Borrowings excluding customer repurchase agreements were $6.2 million, while securities sold under repurchase agreements were $316.8 million.
- Nine-month operating cash flow was $153.0 million. Investing activities used $866.8 million, primarily for purchases of available-for-sale securities; financing activities provided $1.39 billion, mainly from deposit growth.
- The Tier 1 leverage ratio was 9.22%, and the net tangible equity-to-assets ratio was 8.59%.
Material changes versus comparable periods
- Profit growth was driven primarily by the $28.3 million year-to-date improvement in the credit-loss provision and higher fee revenue, partly offset by lower interest-earning asset yields and higher operating costs.
- Net interest margin declined 38 basis points in Q3 and 51 basis points year to date. Management attributed the decline to lower market rates and a greater mix of cash equivalents and lower-yielding investments.
- The investment portfolio increased to $4.40 billion from $3.60 billion at year-end 2020, but its net unrealized position shifted from a $121.0 million gain at December 31, 2020 to a $47.5 million loss at September 30, 2021, largely because of higher interest rates.
- Nonperforming loans were $67.8 million, or 0.93% of total loans, down from 1.04% at year-end 2020 but above 0.43% at September 30, 2020. The increase from the prior year primarily reflected reclassification of extended pandemic-related forbearances.
- COVID-19 loan forbearances declined substantially to four borrowers with $3.9 million of balances, compared with 74 borrowers and $66.5 million at December 31, 2020.
- The company redeemed $77.3 million of subordinated debt held by Community Capital Trust IV in March 2021, leaving no subordinated trust debt outstanding at September 30, 2021.
- The quarterly dividend increased to $0.43 per share from $0.42. No shares were repurchased under the authorized repurchase program during the first nine months; 830 shares were acquired for a deferred compensation plan.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected fourth-quarter 2021 net interest margin to remain below the prior-year quarter, excluding PPP effects, because low short-term rates were expected to continue pressuring asset yields.
- Management expected most remaining first-draw PPP fees to be recognized in fourth-quarter interest income and most second-draw PPP fees over subsequent quarters. Timing depends on borrower eligibility and SBA forgiveness processing.
- Full-year 2021 mortgage banking revenue was expected to remain below 2020 because the company shifted toward retaining most new mortgage production rather than selling it.
- On October 4, 2021, the company announced an agreement to acquire Elmira Savings Bank for $82.8 million in cash. Closing was expected in the first quarter of 2022, subject to shareholder and regulatory approvals. Elmira reported $648.7 million of assets, $551.2 million of deposits, and $465.3 million of net loans at June 30, 2021.
- During 2021, the company completed acquisitions of TGA, FBD, and NuVantage for aggregate consideration of approximately $32.8 million, including contingent consideration, recording approximately $5.7 million of goodwill and $26.3 million of other intangibles.
- The company recorded a $2.9 million payment related to a previously accrued deposit-account class-action settlement, with a $0.1 million litigation-accrual adjustment in the third quarter.
- Management identified COVID-19 developments, interest rates, deposit funding costs, PPP forgiveness, credit quality, collateral values, liquidity, market values of fee-generating businesses, technology, acquisitions, regulation, and litigation as material risks.
- Commitments to extend credit were $1.36 billion and standby letters of credit were $33.4 million. Management considered pending litigation unlikely to be material to financial position; reasonably possible losses beyond recorded liabilities were estimated at $0 to $1 million in aggregate, although individual-period earnings impact could be material.
- Liquidity appeared strong: 30-day and 90-day basic surplus ratios were 24.9% and 25.1%, versus a 7.5% internal requirement; unused FHLB capacity was $1.66 billion, Federal Reserve discount-window availability was $248.9 million, and unencumbered securities were $2.03 billion.
- Interest-rate sensitivity modeling estimated annualized 12-month net interest income changes of positive $15.6 million under a 200-basis-point rise, positive $7.2 million under a 100-basis-point rise, and negative $4.8 million under a 100-basis-point decline. These scenarios were not company forecasts.
- Management stated that disclosure controls were effective as of September 30, 2021 and that there were no material changes in internal control over financial reporting.
Investor verification checklist
- Confirm the issuer identity because the filing text names Community Bank System, Inc., while the request metadata names Community Financial System, Inc.
- Assess sustainability of earnings excluding the unusually favorable credit-loss provision benefit and the effect of PPP fee recognition.
- Monitor net interest margin, cash and securities reinvestment yields, deposit retention, and sensitivity to future rate changes.
- Review business-loan credit migration, nonperforming assets, allowance coverage, and the effect of reduced government support and PPP forgiveness.
- Evaluate the strategic and financial impact, approval status, purchase accounting, and integration risks of the announced Elmira Savings Bank acquisition.
- Reconcile GAAP results with management’s non-GAAP measures, particularly adjusted EPS, adjusted net income, efficiency ratio, and tangible equity.
- Review accumulated other comprehensive losses and potential capital effects if interest rates or securities values change further.
- Verify the timing and amount of contingent consideration for 2021 acquisitions and the ultimate outcome of pending litigation and other commitments.