Business Context and Reporting Period
Registrant: The filing identifies the company as Community Bank System, Inc. (NYSE: CBU), although the request metadata refers to Community Financial System, Inc. The unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the same 2022 periods. The company operates Banking, Employee Benefit Services, and All Other segments, including insurance and wealth management.
Financial Results and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $107.8 million | $110.4 million | $328.1 million | $308.4 million |
| Net interest margin | 3.07% | 3.00% | 3.13% | 2.86% |
| Noninterest revenues | $67.6 million | $65.2 million | $147.1 million | $195.0 million |
| Provision for credit losses | $2.9 million | $5.1 million | $7.1 million | $12.0 million |
| Noninterest expenses | $116.5 million | $108.2 million | $343.6 million | $318.4 million |
| Net income | $44.1 million | $48.7 million | $98.2 million | $135.6 million |
| Diluted EPS | $0.82 | $0.90 | $1.82 | $2.49 |
| GAAP efficiency ratio | 66.4% | 61.6% | 72.3% | 63.2% |
Q3 net income declined 9.4% year over year and nine-month net income declined 27.5%. The nine-month comparison was significantly affected by a $52.3 million pretax realized loss on available-for-sale securities sold during the first quarter as part of a balance-sheet repositioning. Excluding specified unusual and acquisition-related items, operating net income was $44.2 million in Q3 and $140.2 million for the first nine months, down 9.8% and 1.7%, respectively.
Net interest margin improved despite higher funding costs. Q3 fully tax-equivalent NIM was 3.10%, versus 3.03% in the prior-year quarter; nine-month fully tax-equivalent NIM was 3.16%, versus 2.88%. Average loan yields increased, but interest expense rose sharply as deposit and borrowing rates increased.
Loans totaled $9.45 billion at September 30, 2023, up 7.3% from year-end 2022 and 10.6% from September 30, 2022. Total deposits were $13.03 billion, broadly unchanged from year-end 2022, while average Q3 deposits declined 4.2% year over year. The allowance for credit losses was $64.9 million, or 0.69% of loans. Nonperforming loans were 0.39% of loans, total delinquent loans were 0.90%, and Q3 annualized net charge-offs were 0.05% of average loans.
Cash provided by operating activities was $183.7 million for the first nine months, compared with $143.0 million in 2022. Investing activities provided $632.6 million, principally reflecting securities sales, maturities, and paydowns, partially offset by loan growth. Financing activities used $570.4 million, including repayment of $768.4 million of overnight borrowings, $71.0 million of dividends, and $25.8 million of treasury-stock purchases. Cash and cash equivalents ended at $455.8 million.
At September 30, total assets were $15.39 billion and shareholders’ equity was $1.55 billion. The company reported a 10.11% GAAP equity-to-assets ratio and a 4.81% tangible equity-to-assets ratio. The company and bank subsidiary remained well capitalized; the company’s Tier 1 leverage ratio was 9.44% and total risk-based capital ratio was 15.68%.
Material Changes Versus Comparable Periods
- Q3 net interest income decreased 2.4% because higher asset yields were more than offset by higher deposit and borrowing costs and lower average interest-earning assets.
- Nine-month net interest income increased 6.4%, supported by loan growth and higher asset yields.
- Q3 noninterest revenues increased 3.6%, led by employee benefit and insurance services. Nine-month noninterest revenues decreased 24.6% because of the $52.3 million securities-sale loss.
- Noninterest expenses increased 7.7% in Q3 and 7.9% year to date, driven primarily by salaries and benefits, technology, legal and professional fees, marketing, insurance, and other operating costs.
- Loans grew across business lending, consumer mortgage, and installment portfolios. Business lending increased 12.0% from September 2022, while consumer indirect loans increased 15.4%.
- Investment securities declined to $3.96 billion from $5.31 billion at December 31, 2022. The company sold $786.1 million of available-for-sale Treasury and agency securities and used the proceeds to repay overnight borrowings.
- The quarterly common dividend increased to $0.45 per share, marking the company’s 31st consecutive year of dividend increases. The company repurchased 500,000 shares during the first nine months under its 2023 authorization.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects deposit costs and funding costs to continue rising as customers migrate toward higher-rate products and competition for deposits remains elevated. Management also expects the cycle-to-date deposit beta to increase from its reported 13% level.
- The company’s interest-rate sensitivity model indicates projected 12-month net interest income would decline 1.4% under a 100-basis-point rate increase and 2.8% under a 200-basis-point increase, while declining-rate scenarios produce modeled increases. Management states these are not forecasts.
- Immediately available liquidity was $4.81 billion, including $455.8 million of cash, $2.61 billion of unused FHLB and Federal Reserve borrowing capacity, approximately $1.75 billion of securities available for sale or pledge, and a $25 million unsecured correspondent line. This exceeded estimated uninsured deposits, net of collateralized and intercompany deposits, of approximately $2.11 billion.
- Key risks include deposit outflows and funding costs, interest-rate sensitivity, commercial and residential real-estate values, vehicle prices, credit losses, inflation, cybersecurity, technology implementation, regulatory changes, acquisitions, litigation, and market declines affecting fee-based businesses.
- The FDIC has proposed a special assessment related to uninsured deposit losses from recent bank failures. If enacted as proposed, management does not expect the impact to be material, but the timing and amount remain uncertain.
- The company completed acquisitions of Axiom Realty Group and five financial-services businesses during 2023 for aggregate consideration of $9.8 million, including contingent consideration. Acquisition-related revenue and expenses were generally immaterial.
- Management reported effective disclosure controls as of September 30, 2023 and no material changes in internal control over financial reporting during the quarter. No material change was reported in previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile GAAP earnings with management’s non-GAAP operating measures, particularly the effect of the $52.3 million securities-sale loss and acquisition-related adjustments.
- Monitor deposit balances, deposit beta, migration from noninterest-bearing accounts, and the company’s future reliance on higher-cost borrowings.
- Review trends in delinquencies, nonperforming loans, consumer indirect charge-offs, commercial real-estate exposure, and the adequacy of the $64.9 million allowance.
- Assess whether loan growth and higher yields can offset rising funding costs and 7.7% quarterly expense growth.
- Evaluate the duration and unrealized losses in the investment portfolio, including accumulated other comprehensive loss of $691.7 million and the potential effect of further rate changes.
- Confirm the final terms and financial impact of any FDIC special assessment and monitor pending litigation and other contingencies.
- Review the assumptions underlying the company’s liquidity and interest-rate sensitivity models, which management states are subject to substantial uncertainty.