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Section 1: 10-Q (FORM 10-Q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-13695

Graphic

(Exact name of registrant as specified in its charter)

Delaware

    

16-1213679

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

5790 Widewaters Parkway, DeWitt, New York

13214-1883

(Address of principal executive offices)

(Zip Code)

(315) 445-2282

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, $1.00 par value per share

CBU

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 53,541,669 shares of Common Stock, $1.00 par value per share, were outstanding on October 31, 2020.

Table of Contents

TABLE OF CONTENTS

    

    

Page

Part I.

Financial Information

Item 1.

Financial Statements (Unaudited)

Consolidated Statements of Condition September 30, 2020 and December 31, 2019

3

Consolidated Statements of Income Three and nine months ended September 30, 2020 and 2019

4

Consolidated Statements of Comprehensive Income Three and nine months ended September 30, 2020 and 2019

5

Consolidated Statements of Changes in Shareholders’ Equity Three and nine months ended September 30, 2020 and 2019

6

Consolidated Statements of Cash Flows Nine months ended September 30, 2020 and 2019

8

Notes to the Consolidated Financial Statements September 30, 2020

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

69

Item 4.

Controls and Procedures

70

Part II.

Other Information

71

Item 1.

Legal Proceedings

71

Item 1A.

Risk Factors

71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

72

Item 3.

Defaults Upon Senior Securities

72

Item 4.

Mine Safety Disclosures

72

Item 5.

Other Information

73

Item 6.

Exhibits

73

2

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)

(In Thousands, Except Share Data)

September 30,

December 31,

    

2020

    

2019

Assets:

 

  

 

  

Cash and cash equivalents

$

1,836,521

$

205,030

Available-for-sale investment securities (cost of $3,068,406 and $3,011,551, respectively)

 

3,222,722

 

3,044,428

Equity and other securities (cost of $46,419 and $42,965, respectively)

 

47,341

 

43,915

Loans held for sale, at fair value

 

8,151

 

0

Loans

 

7,458,643

 

6,890,543

Allowance for credit losses

 

(64,962)

 

(49,911)

Net loans

 

7,393,681

 

6,840,632

Goodwill, net

 

793,749

 

773,810

Core deposit intangibles, net

 

15,186

 

16,418

Other intangibles, net

 

41,279

 

46,695

Intangible assets, net

 

850,214

 

836,923

Premises and equipment, net

 

165,342

 

164,638

Accrued interest and fees receivable

 

41,420

 

31,647

Other assets

 

279,933

 

243,082

Total assets

$

13,845,325

$

11,410,295

Liabilities:

 

 

Noninterest-bearing deposits

$

3,326,517

$

2,465,902

Interest-bearing deposits

 

7,794,073

 

6,529,065

Total deposits

 

11,120,590

 

8,994,967

Overnight Federal Home Loan Bank borrowings

 

0

 

8,300

Securities sold under agreement to repurchase, short-term

 

280,767

 

241,708

Other Federal Home Loan Bank borrowings

 

7,681

 

3,750

Subordinated notes payable

 

13,735

 

13,795

Subordinated debt held by unconsolidated subsidiary trusts

 

77,320

 

77,320

Accrued interest and other liabilities

 

246,572

 

215,221

Total liabilities

 

11,746,665

 

9,555,061

Commitments and contingencies (See Note J)

 

 

Shareholders' equity:

 

 

Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued

 

0

 

0

Common stock, $1.00 par value, 75,000,000 shares authorized; 53,697,919 and 51,974,726 shares issued, respectively

 

53,698

 

51,975

Additional paid-in capital

 

1,021,798

 

927,337

Retained earnings

 

936,273

 

882,851

Accumulated other comprehensive gain (loss)

 

83,962

 

(10,226)

Treasury stock, at cost (160,326 shares, including 160,311 shares held by deferred compensation arrangements at September 30, 2020 and 180,803 shares including 179,548 shares held by deferred compensation arrangements at December 31, 2019, respectively)

 

(6,131)

 

(6,823)

Deferred compensation arrangements (160,311 and 179,548 shares, respectively)

 

9,060

 

10,120

Total shareholders' equity

 

2,098,660

 

1,855,234

Total liabilities and shareholders' equity

$

13,845,325

$

11,410,295

The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In Thousands, Except Per-Share Data)

    

Three Months Ended

    

Nine Months Ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

Interest income:

 

  

 

  

 

  

 

  

Interest and fees on loans

$

79,646

$

79,931

$

236,931

$

227,701

Interest and dividends on taxable investments

 

14,881

 

15,862

 

45,633

 

49,376

Interest and dividends on nontaxable investments

 

2,963

 

2,854

 

9,113

 

8,603

Total interest income

 

97,490

 

98,647

 

291,677

 

285,680

Interest expense:

 

 

 

 

Interest on deposits

 

3,655

 

5,859

 

13,373

 

14,526

Interest on borrowings

 

292

 

347

 

1,280

 

1,397

Interest on subordinated notes payable

 

184

 

161

 

553

 

161

Interest on subordinated debt held by unconsolidated subsidiary trusts

 

394

 

1,004

 

1,501

 

3,161

Total interest expense

 

4,525

 

7,371

 

16,707

 

19,245

Net interest income

 

92,965

 

91,276

 

274,970

 

266,435

Provision for credit losses

 

1,945

 

1,751

 

17,313

 

5,573

Net interest income after provision for credit losses

 

91,020

 

89,525

 

257,657

 

260,862

Noninterest revenues:

 

 

 

 

Deposit service fees

 

14,260

 

16,920

 

42,722

 

48,780

Mortgage banking

 

3,908

 

(138)

 

6,199

 

276

Other banking services

 

924

 

1,083

 

2,574

 

3,352

Employee benefit services

 

25,159

 

24,329

 

74,593

 

72,170

Insurance services

 

8,531

 

8,527

 

24,772

 

24,718

Wealth management services

 

6,889

 

6,363

 

20,389

 

19,290

Gain on sale of investment securities, net

 

0

 

0

 

0

 

4,882

Unrealized (loss) gain on equity securities

 

(12)

 

10

 

(30)

 

28

Total noninterest revenues

 

59,659

 

57,094

 

171,219

 

173,496

Noninterest expenses:

 

 

 

 

Salaries and employee benefits

 

57,280

 

56,061

 

170,252

 

163,448

Occupancy and equipment

 

10,134

 

9,801

 

30,627

 

29,708

Data processing and communications

 

12,096

 

10,675

 

33,342

 

30,475

Amortization of intangible assets

 

3,581

 

3,960

 

10,772

 

11,994

Legal and professional fees

 

2,365

 

2,595

 

8,577

 

7,999

Business development and marketing

 

3,145

 

2,604

 

7,162

 

8,532

Litigation accrual

2,950

0

2,950

0

Acquisition expenses

 

796

 

6,061

 

4,537

 

7,789

Other expenses

 

4,619

 

5,172

 

13,313

 

16,812

Total noninterest expenses

 

96,966

 

96,929

 

281,532

 

276,757

Income before income taxes

 

53,713

 

49,690

 

147,344

 

157,601

Income taxes

 

10,904

 

10,472

 

29,153

 

31,422

Net income

$

42,809

$

39,218

$

118,191

$

126,179

Basic earnings per share

$

0.80

$

0.76

$

2.23

$

2.44

Diluted earnings per share

$

0.79

$

0.75

$

2.22

$

2.41

The accompanying notes are an integral part of the consolidated financial statements.

4

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

Pension and other post retirement obligations:

 

  

 

  

 

  

 

  

Amortization of actuarial losses included in net periodic pension cost, gross

$

820

$

651

$

2,460

$

1,954

Tax effect

 

(197)

 

(158)

 

(591)

 

(477)

Amortization of actuarial losses included in net periodic pension cost, net

 

623

 

493

 

1,869

$

1,477

Amortization of prior service cost included in net periodic pension cost, gross

 

15

 

(28)

 

46

 

(86)

Tax effect

 

(4)

 

6

 

(11)

 

21

Amortization of prior service cost included in net periodic pension cost, net

 

11

 

(22)

 

35

 

(65)

Other comprehensive income related to pension and other post-retirement obligations, net of taxes

 

634

 

471

 

1,904

 

1,412

Unrealized (losses) gains on available-for-sale securities:

 

 

 

 

Net unrealized holding (losses) gains arising during period, gross

 

(8,821)

 

8,756

 

121,439

 

66,208

Tax effect

 

2,118

 

(2,136)

 

(29,155)

 

(16,157)

Net unrealized holding (losses) gains arising during period, net

 

(6,703)

 

6,620

 

92,284

 

50,051

Reclassification adjustment for net gains included in net income, gross

 

0

 

0

 

0

 

(4,882)

Tax effect

 

0

 

0

 

0

 

1,194

Reclassification adjustment for net gains included in net income, net

 

0

 

0

 

0

 

(3,688)

Other comprehensive income related to unrealized (losses) gains on available-for-sale securities, net of taxes

 

(6,703)

 

6,620

 

92,284

 

46,363

Other comprehensive (loss) income, net of tax

 

(6,069)

 

7,091

 

94,188

 

47,775

Net income

 

42,809

 

39,218

 

118,191

 

126,179

Comprehensive income

$

36,740

$

46,309

$

212,379

$

173,954

    

As of

September 30,

December 31, 

    

2020

    

2019

Accumulated Other Comprehensive Income (Loss) By Component:

Unrealized (loss) for pension and other post-retirement obligations

$

(43,669)

$

(46,175)

Tax effect

 

10,691

 

11,293

Net unrealized (loss) for pension and other post-retirement obligations

 

(32,978)

 

(34,882)

Unrealized gain on available-for-sale securities

 

154,316

 

32,877

Tax effect

 

(37,376)

 

(8,221)

Net unrealized gain on available-for-sale securities

 

116,940

 

24,656

Accumulated other comprehensive income (loss)

$

83,962

$

(10,226)

The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended September 30, 2020 and 2019

(In Thousands, Except Share Data)

    

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

Common Stock

Additional

Other

Deferred

Shares

Amount

Paid-In

Retained

Comprehensive

Treasury

Compensation

Outstanding

Issued

Capital

Earnings

Income (Loss)

Stock

Arrangements

Total

Balance at June 30, 2020

 

53,514,216

$

53,672

$

1,019,291

$

916,002

$

90,031

$

(6,066)

$

8,995

$

2,081,925

Net income

 

 

 

 

42,809

 

 

 

 

42,809

Other comprehensive loss, net of tax

 

 

 

 

 

(6,069)

 

 

 

(6,069)

Cash dividends declared:

 

 

 

 

 

  

 

 

 

Common, $0.42 per share

 

 

 

 

(22,538)