Community Bank System, Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. The filing identifies the registrant as Community Bank System, Inc. (NYSE: CBU), although the request metadata names Community Financial System, Inc. The company is a diversified financial services holding company with Banking, Employee Benefit Services, insurance and wealth management operations.
Business context
- Community Bank, N.A. operated 193 full-service branches and 12 drive-thru-only locations across Upstate New York, Northeastern Pennsylvania, Vermont and Western Massachusetts.
- BPAS provides national employee benefit administration, trust, recordkeeping, actuarial and consulting services; it served more than 5,800 plans and approximately 810,000 participants.
- At December 31, 2023, the company had 2,849 employees, approximately $8.7 billion of wealth management assets under management and more than $110 billion of employee benefit trust assets.
- 2023 acquisitions included Axiom Realty Group and several financial services businesses. Aggregate consideration for the latter acquisitions was $8.1 million; Axiom consideration was $1.8 million.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $437.3 million | $420.6 million | +4.0% |
| Total noninterest revenues | $214.8 million | $258.7 million | -17.0% |
| Noninterest revenues excluding securities loss and other market items | $267.0 million | $258.8 million | +3.2% |
| Noninterest expenses | $472.7 million | $424.3 million | +11.4% |
| Provision for credit losses | $11.2 million | $14.8 million | -24.2% |
| Net income | $131.9 million | $188.1 million | -29.9% |
| Diluted EPS | $2.45 | $3.46 | -29.2% |
| Net interest margin | 3.11% | 2.89% | +22 bps |
| Return on average assets | 0.87% | 1.21% | -34 bps |
| Return on average equity | 8.27% | 10.85% | -258 bps |
| GAAP efficiency ratio | 72.5% | 62.5% | +10.0 pts |
| Adjusted net income | $189.8 million | $203.4 million | -6.7% |
| Adjusted diluted EPS | $3.51 | $3.74 | -6.2% |
Balance sheet, cash flow and liquidity
- Total assets were $15.56 billion, down 1.8% from $15.84 billion. Loans increased 10.2% to $9.70 billion, while total deposits declined 0.6% to $12.93 billion.
- Shareholders’ equity increased 9.4% to $1.70 billion, primarily reflecting net income and a $129.5 million improvement in accumulated other comprehensive loss related to the investment portfolio.
- Net cash provided by operating activities was $228.4 million, compared with $214.6 million in 2022. Investing activities provided $335.8 million, principally due to investment securities sales and maturities, partly offset by $923.3 million of loan growth. Financing activities used $583.1 million.
- Year-end borrowings were $765.2 million, down from $1.14 billion. The balance included $407.6 million of FHLB borrowings, $304.6 million of repurchase agreements and $53.0 million of overnight borrowings.
- Immediately available liquidity totaled $4.83 billion, consisting of cash, FHLB and Federal Reserve borrowing capacity and net unpledged securities. This equaled 221% of estimated uninsured deposits of $2.18 billion.
- The company reported a 30-day basic liquidity surplus ratio of 11.5% and a 90-day ratio of 10.2%, above its 7.5% internal requirement. Management stated that stress testing showed sufficient liquidity for the following year.
- The company and Bank were categorized as well capitalized. Company ratios included a 9.34% Tier 1 leverage ratio, 14.75% CET1 ratio and 15.46% total risk-based capital ratio. Bank ratios were 7.70%, 12.11% and 12.82%, respectively.
Material changes versus the prior comparable period
- Profitability declined substantially because of a $52.3 million pretax realized loss on sales of investment securities during a first-quarter balance sheet repositioning. The company sold $786.1 million of securities and used the $733.8 million proceeds to repay overnight borrowings.
- Higher loan balances and yields increased net interest income, but deposit and borrowing costs rose sharply. Total interest expense increased to $104.1 million from $23.1 million, and the average cost of interest-bearing liabilities increased to 1.08% from 0.24%.
- Average deposits declined 2.5%, while average borrowings increased 26.5%. Noninterest-bearing deposits represented approximately 28% of ending deposits, and the company did not use brokered or wholesale deposits.
- Noninterest expenses increased $48.4 million, reflecting higher compensation and medical costs, FDIC insurance expense, fraud losses, technology spending, legal fees, contingent consideration adjustments and other operating costs.
- Nonperforming loans increased to $54.6 million, or 0.56% of total loans, from $33.4 million, or 0.38%. Delinquencies increased to 1.06% from 0.89%, while the allowance for credit losses increased to $66.7 million from $61.1 million.
- Gross loans increased $895.2 million, including 12.0% growth in business lending and 9.0% growth in consumer mortgage loans. Commercial real estate represented approximately $3.08 billion, or 24% of total loans.
- Insurance revenue increased 18.3%, employee benefit services revenue increased 2.2%, and wealth management revenue increased 0.9%. Ending employee benefit trust assets rose to $124.8 billion, while wealth management assets under management increased to $8.7 billion.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management’s stated objectives are continued loan and deposit growth, increased fee-based revenue, disciplined acquisitions and branch optimization, technology investment and active interest-rate and liquidity management.
- The company’s interest-rate sensitivity model, which is not a forecast, estimated that a parallel 200-basis-point increase in rates would reduce projected annualized net interest income by $16.1 million, or 3.6%, while a 200-basis-point decrease would increase it by $8.5 million, or 1.9%.
- Management identified interest-rate, deposit and liquidity risk, credit losses, commercial real estate weakness, regional economic conditions, regulatory and compliance costs, litigation, cybersecurity, fraud, technology execution, employee retention and acquisition integration as material risks.
- Commercial real estate exposure was described as geographically and industry diversified, but management highlighted elevated rates, office vacancies and potential property-value pressure as risks. Approximately 11% of the loan portfolio was acquired and not originated by the company.
- The company recorded a $5.8 million litigation accrual for an anticipated settlement of a threatened collective and class action concerning branch employee wages. The settlement was agreed in February 2024, subject to documentation and court approval.
- The company recorded a $1.5 million FDIC special assessment accrual in 2023. The assessment is expected to be collected over eight quarterly periods beginning in 2024, subject to adjustment by the FDIC.
- In the fourth quarter, the company initiated a retail workforce optimization program, reduced branch staffing by approximately 99 employees and recorded $1.2 million of restructuring expense. Management does not expect further expense from this plan.
- Subsequent events included a February 2024 acquisition by BPAS for $6.8 million in cash plus estimated contingent consideration of $3.9 million, and $300 million of Federal Reserve Bank Term Funding Program borrowings obtained in January 2024 at 4.87%, maturing in March 2024.
- Cybersecurity threats had not resulted in a material cybersecurity incident through the filing date. The company stated that a material breach could cause financial losses, remediation costs, litigation, regulatory penalties and reputational damage.
Most important facts for investors to verify
- Earnings quality: Reconcile GAAP net income and EPS with adjusted results, and assess whether the securities repositioning loss and other excluded items are truly nonrecurring.
- Net interest margin: Monitor deposit repricing, deposit attrition, funding costs and the effect of future Federal Reserve rate changes.
- Credit quality: Track nonperforming loans, delinquencies, charge-offs and allowance coverage, particularly in commercial real estate and consumer installment lending.
- Liquidity and funding: Verify the stability of deposits, uninsured deposit estimates, borrowing capacity and the effect of the January 2024 Federal Reserve borrowing.
- Investment portfolio: Review unrealized losses, securities duration, realized losses and potential effects on tangible equity if securities must be sold.
- Legal and regulatory matters: Confirm final court approval and payment of the wage settlement, future FDIC special assessment expense and any regulatory examination developments.
- Capital allocation: Assess the sustainability of the $0.45 quarterly dividend, the 72.4% 2023 payout ratio and the newly authorized repurchase program for up to 2.697 million shares.
- Acquisitions and intangible assets: Evaluate integration results, contingent consideration payments and impairment sensitivity for approximately $845.4 million of goodwill and $52.6 million of amortizing intangibles.