Community Bank System, Inc. — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. The filing identifies the registrant as Community Bank System, Inc. (NYSE: CBU). It reports consolidated results for Banking, Employee Benefit Services, and All Other operations, including wealth management and insurance.
Business Context
- Community Bank, N.A. operated 231 full-service branches across Upstate New York, Northeastern Pennsylvania, Vermont, and Western Massachusetts.
- BPAS provides national employee benefit, retirement-plan, trust, actuarial, and consulting services. BPAS reported approximately $89.3 billion of employee benefit trust assets and served more than 3,800 plans.
- The Company employed 2,752 full-time and 286 part-time or temporary employees at year-end.
- The July 2019 Kinderhook Bank merger added 11 branches, approximately $642.8 million of assets, $479.9 million of loans, and $568.2 million of deposits.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $359.2 million | $345.1 million | Up 4.1% |
| Provision for loan losses | $8.4 million | $10.8 million | Down 22.2% |
| Noninterest revenues | $230.6 million | $224.1 million | Up 2.9% |
| Noninterest expenses | $372.0 million | $345.3 million | Up 7.7% |
| Income before taxes | $209.3 million | $213.0 million | Down 1.7% |
| Net income | $169.1 million | $168.6 million | Up 0.3% |
| Diluted EPS | $3.23 | $3.24 | Down 0.3% |
| Net interest margin | 3.76% | 3.73% | Up 3 basis points |
| Return on average assets | 1.53% | 1.58% | Down 5 basis points |
| Return on average equity | 9.42% | 10.20% | Down 78 basis points |
| Efficiency ratio | 59.6% | 58.0% | Higher by 1.6 points |
- Adjusted results: Adjusted net income, excluding specified acquisition, securities, intangible amortization, and acquired-loan items, increased 2.3% to $180.0 million. Adjusted diluted EPS increased 1.5% to $3.44.
- Balance sheet: Total assets were $11.41 billion, up from $10.61 billion. Gross loans were $6.89 billion, up 9.7%, and deposits were $8.99 billion, up 8.1%. Shareholders’ equity increased 8.3% to $1.86 billion.
- Asset quality: Nonperforming loans were $24.3 million, or 0.35% of total loans, compared with 0.40% in 2018. Net charge-offs were $7.8 million, or 0.12% of average loans. The allowance for loan losses was $49.9 million, representing 0.72% of loans and 206% of nonperforming loans.
- Capital: The Company reported a 10.80% Tier 1 leverage ratio, 17.23% Tier 1 risk-based capital ratio, 17.99% total risk-based capital ratio, and 16.11% common equity Tier 1 ratio. The Company and Bank were categorized as well capitalized.
- Liquidity: Cash and cash equivalents were $205.0 million. The Bank reported approximately $1.8 billion of unused FHLB borrowing capacity, $1.7 billion of unencumbered securities, and $25.0 million of unsecured correspondent-bank credit lines. The reported 30-day and 90-day basic surplus ratios were each 13.9%, above the internal 7.5% requirement.
- Cash flow: Operating activities generated $202.5 million of cash. Investing activities used $157.1 million, primarily reflecting securities purchases and loan growth. Financing activities used $52.3 million, including dividends and debt repayments. Ending cash and cash equivalents were $205.0 million.
- Debt: Year-end borrowings were $344.9 million, down from $413.7 million. This included $241.7 million of short-term repurchase agreements, $77.3 million of subordinated trust debt, and $13.8 million of subordinated notes.
Material Changes Versus 2018
- Kinderhook materially increased loans, deposits, branches, goodwill, and operating expenses. The transaction produced approximately $8.0 million of acquisition expenses in 2019.
- Net interest income benefited from higher average earning assets and loan growth, while higher deposit and borrowing costs increased interest expense by $8.9 million.
- Banking noninterest revenue declined excluding securities gains, primarily because of reduced debit-interchange revenue following the Durbin amendment; the Kinderhook deposit base partly offset the decline.
- Employee Benefit Services revenue increased 5.3% to $99.5 million, and All Other revenue increased to $59.1 million.
- Net unrealized gains in the available-for-sale investment portfolio improved shareholders’ accumulated other comprehensive loss by approximately $37.1 million after tax.
- The quarterly dividend increased to $0.41 per share in the third quarter, producing $1.58 of dividends declared per share for 2019. The Company reported its 27th consecutive year of dividend increases.
- The Company authorized a 2020 repurchase program for up to 2.6 million shares; no shares were repurchased under the announced 2019 program.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Pending acquisition: The Company agreed to acquire Steuben Trust Corporation for approximately $104.4 million in cash and stock. Closing was expected in the second quarter of 2020, subject to regulatory and shareholder approvals, with transaction costs expected in 2020. The filing does not provide earnings guidance.
- Interest-rate sensitivity: Management’s model estimated that a 200-basis-point increase in rates would increase projected subsequent 12-month net interest income by $4.8 million, while a 150-basis-point decrease would reduce it by $8.0 million. The filing states that this is not a forecast.
- CECL adoption: On January 1, 2020, the Company adopted the current expected credit loss standard and recorded a $0.5 million increase to retained earnings. The adjustment included a $0.7 million decrease in the loan-loss allowance, a $1.0 million loan adjustment, and a $1.2 million increase in other liabilities for off-balance-sheet credit exposures.
- COVID-19: The filing discusses the potential effects of the novel coronavirus on customers, regional economies, operations, repayment capacity, and cash flows. The filing states that no subsequent event required recognition or disclosure in the financial statements.
- Legal proceedings: Management did not expect pending or threatened litigation to materially affect consolidated financial position. The estimated range of reasonably possible losses beyond recorded liabilities was $0 to $1 million, although particular-period operating results could still be affected.
- Key risks: Major risks include interest-rate and liquidity exposure, regional economic conditions, credit losses, acquired-loan performance, regulatory and compliance costs, cybersecurity and data breaches, third-party vendor dependence, competition, litigation, goodwill or intangible impairment, LIBOR transition, and acquisition integration.
- Unusual items: 2019 included a $4.9 million net gain on investment-security sales and $8.6 million of acquisition expenses. Goodwill impairment was not recorded.
Most Important Facts for Investors to Verify
- Completion, financing, integration costs, and expected benefits of the Steuben acquisition.
- Post-adoption effects of CECL on allowance levels, credit costs, regulatory capital, and earnings.
- Whether loan and deposit growth from Kinderhook is sustained organically and whether operating expenses normalize.
- Trends in deposit pricing, net interest margin, debit-interchange revenue, and the Company’s interest-rate sensitivity.
- Credit performance of acquired loans, commercial real estate exposure, nonperforming loans, charge-offs, and allowance coverage.
- Availability and regulatory constraints on Bank dividends supporting the parent company’s dividends and debt obligations.
- Progress on LIBOR replacement for the Company’s floating-rate subordinated debt and other financial arrangements.
- Potential impacts from COVID-19, regional economic deterioration, regulatory actions, cybersecurity incidents, and pending litigation.