Community Bank System, Inc. — Q1 2021 Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; unaudited consolidated results. The filing identifies the registrant as Community Bank System, Inc., which differs from the requested company name, Community Financial System, Inc., and should be verified.
Business context
The company operates a diversified financial services business comprising banking, employee benefit services, wealth management and insurance. The June 2020 Steuben Trust Corporation merger added approximately $607.8 million of assets, $516.3 million of deposits and 11 full-service offices. Steuben contributed approximately $3.2 million of revenue and $1.3 million of direct expenses in Q1 2021.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net interest income | $94.0 million | $90.1 million | Up 4.3% |
| Provision for credit losses | $(5.7) million benefit | $5.6 million expense | $11.3 million favorable |
| Noninterest revenues | $58.5 million | $58.6 million | Down 0.2% |
| Noninterest expenses | $93.2 million | $93.7 million | Down 0.4% |
| Income before taxes | $65.0 million | $49.4 million | Up 31.4% |
| Net income | $52.9 million | $40.1 million | Up 31.7% |
| Diluted EPS | $0.97 | $0.76 | Up $0.21 |
| Net interest margin | 3.03% | 3.65% | Down 62 basis points |
| Efficiency ratio | 59.0% | 60.4% | Improved 140 basis points |
| Adjusted diluted EPS | $1.00 | $0.80 | Up 25.0% |
The effective tax rate was 18.6%, compared with 18.8% in the prior-year quarter. Adjusted return on average assets was 1.57%, and adjusted return on average equity was 10.73%.
Balance sheet, cash flow and liquidity
- Total assets were $14.62 billion at March 31, 2021, up from $13.93 billion at December 31, 2020 and $11.81 billion at March 31, 2020.
- Total loans were $7.37 billion, down 0.6% from year-end but up 7.3% year over year. PPP loans totaled approximately $410.9 million, including $219.4 million of first-draw loans and $191.5 million of second-draw loans.
- Total deposits were $12.20 billion, up $979.3 million from year-end, primarily reflecting government stimulus-related inflows and the Steuben acquisition.
- Cash and cash equivalents were $2.15 billion, including approximately $2.0 billion held in interest-earning deposits at the Federal Reserve, FHLB and correspondent banks.
- Operating activities provided $61.8 million of cash. Investing activities used $415.0 million, primarily due to $546.7 million of available-for-sale securities purchases. Financing activities provided $858.7 million, principally from the increase in deposits.
- Borrowings excluding customer repurchase agreements were $9.3 million. Customer repurchase agreements were $257.8 million. The company redeemed $77.3 million of trust-preferred subordinated debt during the quarter.
- Available liquidity included $1.66 billion of unused FHLB borrowing capacity, $247.9 million of Federal Reserve discount-window availability, $1.68 billion of unencumbered securities and $25.0 million of unsecured correspondent-bank lines.
- The 30-day and 90-day basic surplus liquidity ratios were 22.5% and 22.0%, respectively, versus an internal policy minimum of 7.5%.
- The Tier 1 leverage ratio was 9.63%; the net tangible equity-to-assets ratio was 8.48%, down from 9.92% at December 31, 2020.
Material changes versus comparable periods
- Profit growth was driven primarily by the reversal of credit-loss provisions, higher net interest income and lower operating expenses.
- Net interest income increased despite a 62-basis-point decline in net interest margin, as average interest-earning assets increased by approximately $2.65 billion and funding costs declined.
- Average deposits increased 27.6% year over year to $11.55 billion, while average loans increased approximately $482.1 million.
- Noninterest revenue was broadly stable: employee benefit, wealth management and insurance revenue increased, offset by lower deposit service charges and mortgage banking revenue.
- Net unrealized losses on available-for-sale securities were $172.8 million after tax in Q1, causing comprehensive loss of $119.2 million despite net income of $52.9 million. Accumulated other comprehensive loss was $110.0 million at March 31, 2021, compared with accumulated other comprehensive income of $62.1 million at year-end.
- Total shareholders’ equity declined $132.7 million from year-end to $1.97 billion, primarily because of the available-for-sale securities valuation decline and dividends.
- Nonperforming loans were $75.5 million, or 1.02% of total loans, compared with 1.04% at year-end and 0.46% a year earlier. The increase from the prior year largely reflected reclassification of extended pandemic-related forbearances, particularly among hospitality, travel and entertainment borrowers.
Outlook, risks and unusual items
- Management expects Q2 2021 net interest margin to remain below the prior-year quarter, excluding PPP effects, because of the sharp decline in short-term interest rates during 2020.
- The company expects to recognize most remaining first-draw PPP deferred fees of $3.4 million in Q2 and most second-draw deferred fees of $8.3 million in Q3 and Q4. Timing depends on borrower eligibility and SBA forgiveness processing.
- Management does not expect similarly large credit-loss benefits in future periods. The Q1 benefit reflected improved economic forecasts, government support and unusually low recent charge-offs.
- At March 31, 2021, 47 borrowers representing $75.6 million of loans remained in COVID-19-related forbearance. The future effects of the pandemic, vaccine rollout, government support expiration and PPP forgiveness remain uncertain.
- The available-for-sale securities portfolio had a $106.3 million net unrealized loss at quarter-end, principally attributable to higher interest rates. Management concluded the losses were not credit-related and recorded no credit-loss allowance for the portfolio.
- Pending litigation was not expected to be material to consolidated financial position. Reasonably possible losses beyond recorded liabilities were estimated at $0 to $1 million in aggregate. A $3.0 million deposit-account litigation accrual was recorded in 2020, and no further accrual was anticipated for that matter.
- The board authorized a 2021 repurchase program for up to 2.68 million shares, but no shares were repurchased under the program during the quarter. The 1,012 shares acquired in January related to a deferred compensation plan.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the registrant identity and ticker: the supplied metadata names Community Financial System, while the filing names Community Bank System, Inc. and lists CBU.
- Assess how quickly PPP forgiveness reduces loan balances, deferred-fee income and business-lending growth.
- Monitor whether pandemic-related forbearances convert into additional nonperforming loans, charge-offs or higher credit-loss provisions.
- Evaluate the sustainability of Q1 earnings, given the $5.7 million provision benefit and management’s statement that similarly large benefits are not expected to recur.
- Track net interest margin pressure from low rates, excess cash, deposit repricing and the timing of PPP fee recognition.
- Review the sensitivity of tangible capital and comprehensive income to further changes in interest rates and available-for-sale securities valuations.
- Compare future deposit levels and liquidity capacity with the unusually large stimulus-related inflows reported in Q1.