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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 June 30, 2022

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 .

Number of shares of common stock, par value $1.00 per share, outstanding as of the close of business on July 31, 2022: 53,732,016 shares

TABLE OF CONTENTS

Part I.

    

Financial Information

    

Page

Item 1.

Financial Statements (Unaudited)

Consolidated Statements of Condition June 30, 2022 and December 31, 2021

3

Consolidated Statements of Income Three and six months ended June 30, 2022 and 2021

4

Consolidated Statements of Comprehensive Income (Loss) Three and six months ended June 30, 2022 and 2021

5

Consolidated Statements of Changes in Shareholders’ Equity Three and six months ended June 30, 2022 and 2021

6

Consolidated Statements of Cash Flows Six months ended June 30, 2022 and 2021

8

Notes to the Consolidated Financial Statements June 30, 2022

9

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4.

Controls and Procedures

56

Part II.

Other Information

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

58

2

Part I. Financial Information

Item 1. Financial Statements

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)

(In Thousands, Except Share Data)

June 30, 

December 31, 

2022

    

2021

Assets:

  

 

  

Cash and cash equivalents

$

197,628

$

1,875,064

Available-for-sale investment securities includes pledged securities that can be sold or repledged of $433,578 and $485,414, respectively (cost of $6,255,259 and $4,980,102, respectively)

 

5,590,427

 

4,934,210

Equity and other securities (cost of $51,653 and $43,917, respectively)

 

52,595

 

44,879

Loans

 

8,144,696

 

7,373,639

Allowance for credit losses

 

(55,542)

 

(49,869)

Net loans

 

8,089,154

 

7,323,770

 

Goodwill

 

849,813

 

799,109

Core deposit intangibles, net

 

14,817

 

9,087

Other intangibles, net

 

53,261

 

56,139

Goodwill and intangible assets, net

 

917,891

 

864,335

Premises and equipment, net

 

169,015

 

160,651

Accrued interest and fees receivable

 

43,215

 

35,894

Other assets

 

427,908

 

313,854

Total assets

$

15,487,833

$

15,552,657

 

 

Liabilities:

Noninterest-bearing deposits

$

4,092,073

$

3,921,663

Interest-bearing deposits

 

9,265,699

 

8,989,505

Total deposits

 

13,357,772

 

12,911,168

Overnight Federal Reserve Bank borrowings

 

66,000

 

0

Securities sold under agreement to repurchase, short-term

 

223,755

 

324,720

Other Federal Home Loan Bank borrowings

 

19,471

 

1,888

Subordinated notes payable

 

3,263

 

3,277

Accrued interest and other liabilities

 

155,876

 

210,797

Total liabilities

 

13,826,137

 

13,451,850

 

 

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; 54,185,117 and 54,092,421 shares issued, respectively

 

54,185

 

54,092

Additional paid-in capital

 

1,046,303

 

1,041,304

Retained earnings

 

1,098,664

 

1,058,286

Accumulated other comprehensive loss

 

(518,727)

 

(50,627)

Treasury stock, at cost (451,090 shares, including 133,575 shares held by deferred compensation arrangements at June 30, 2022 and 214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021, respectively)

 

(26,369)

 

(10,610)

Deferred compensation arrangements (133,575 and 146,860 shares, respectively)

 

7,640

 

8,362

Total shareholders’ equity

 

1,661,696

 

2,100,807

Total liabilities and shareholders’ equity

$

15,487,833

$

15,552,657

See accompanying notes to consolidated financial statements (unaudited).

3

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In Thousands, Except Per-Share Data)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Interest income:

 

  

 

  

 

  

 

  

Interest and fees on loans

$

77,959

$

75,907

$

150,473

$

155,621

Interest and dividends on taxable investments

 

24,899

 

16,789

 

47,491

 

31,964

Interest and dividends on nontaxable investments

 

3,317

 

2,664

 

5,907

 

5,440

Total interest income

 

106,175

 

95,360

 

203,871

 

193,025

Interest expense:

 

 

 

 

Interest on deposits

 

2,691

 

2,963

 

5,256

 

6,075

Interest on borrowings

 

304

 

253

 

525

 

521

Interest on subordinated notes payable

 

39

 

39

 

77

 

77

Interest on subordinated debt held by unconsolidated subsidiary trusts

 

0

 

0

 

0

 

293

Total interest expense

 

3,034

 

3,255

 

5,858

 

6,966

Net interest income

 

103,141

 

92,105

 

198,013

 

186,059

Provision for credit losses

 

6,038

 

(4,338)

 

6,944

 

(10,057)

Net interest income after provision for credit losses

 

97,103

 

96,443

 

191,069

 

196,116

Noninterest revenues:

 

 

 

 

Deposit service fees

 

16,138

 

14,236

 

32,293

 

28,316

Mortgage banking

269

 

331

 

424

 

1,019

Other banking services

 

870

 

980

 

1,609

 

1,834

Employee benefit services

 

28,921

 

27,477

 

58,501

 

54,010

Insurance services

 

9,780

 

8,209

 

20,189

 

16,362

Wealth management services

 

8,141

8,227

16,774

16,426

Unrealized (loss) gain on equity securities

 

(22)

 

0

 

(20)

 

24

Total noninterest revenues

 

64,097

 

59,460

 

129,770

 

117,991

Noninterest expenses:

 

 

 

 

Salaries and employee benefits

 

65,398

 

57,892

 

127,046

 

115,524

Occupancy and equipment

 

10,424

 

10,270

 

21,376

 

21,570

Data processing and communications

 

13,611

 

12,766

 

26,270

 

25,157

Amortization of intangible assets

 

3,851

 

3,246

 

7,583

 

6,597

Legal and professional fees

 

3,385

 

2,499

 

7,002

 

5,533

Business development and marketing

 

3,616

 

2,659

 

6,359

 

4,689

Acquisition expenses

3,960

4

4,259

31

Acquisition-related contingent consideration adjustment

400

0

400

0

Other expenses

 

5,779

 

4,207

9,936

 

7,688

Total noninterest expenses

 

110,424

 

93,543

210,231

 

186,789

Income before income taxes

 

50,776

 

62,360

110,608

 

127,318

Income taxes

 

10,971

 

14,416

23,748

 

26,524

Net income

$

39,805

$

47,944

$

86,860

$

100,794

Basic earnings per share

$

0.74

$

0.89

$

1.61

$

1.86

Diluted earnings per share

$

0.73

$

0.88

$

1.60

$

1.85

See accompanying notes to consolidated financial statements (unaudited).

4

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In Thousands)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Pension and other post retirement obligations:

  

 

  

 

  

 

  

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

$

220

$

911

$

440

$

1,822

Tax effect

 

(53)

 

(219)

 

(107)

 

(438)

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

 

167

 

692

 

333

1,384

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

 

109

 

50

 

218

 

100

Tax effect

 

(27)

 

(12)

 

(53)

 

(24)

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

 

82

 

38

 

165

 

76

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

 

249

 

730

 

498

 

1,460

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

 

 

 

 

Net unrealized (losses) gains arising during period, gross

 

(260,180)

 

80,074

 

(618,939)

 

(147,353)

Tax effect

 

63,198

 

(19,247)

 

150,341

 

35,416

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

 

(196,982)

 

60,827

 

(468,598)

 

(111,937)

Other comprehensive (loss) income, net of tax

 

(196,733)

 

61,557

 

(468,100)

 

(110,477)

Net income

 

39,805

 

47,944

 

86,860

 

100,794

Comprehensive (loss) income

$

(156,928)

$

109,501

$

(381,240)

$

(9,683)

As of

June 30, 

December 31, 

    

2022

    

2021

Accumulated Other Comprehensive Loss By Component:

  

Unrealized loss for pension and other post-retirement obligations

  

$

(19,966)

$

(20,624)

Tax effect

  

 

4,994

 

5,154

Net unrealized loss for pension and other post-retirement obligations

  

 

(14,972)

 

(15,470)

Unrealized loss on available-for-sale securities

  

 

(664,832)

 

(45,893)

Tax effect

  

 

161,077

 

10,736

Net unrealized loss on available-for-sale securities

  

 

(503,755)

 

(35,157)

Accumulated other comprehensive loss

  

$

(518,727)

$

(50,627)

See accompanying notes to consolidated financial statements (unaudited).

5

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended June 30, 2022 and 2021

(In Thousands, Except Share Data)

    

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

Common Stock

Additional

Other

Deferred

Shares

Amount

Paid-In

Retained

Comprehensive

Treasury

Compensation

    

Outstanding

    

Issued

    

Capital

    

Earnings

    

Loss

    

Stock

    

Arrangements

    

Total

Balance at March 31, 2022

 

53,913,362

$

54,164

$

1,043,707

$

1,082,107

$

(321,994)

$

(13,464)

$

7,583

$

1,852,103

Net income

 

 

 

 

39,805

 

 

 

 

39,805

Other comprehensive loss, net of tax

 

 

 

 

 

(196,733)

 

 

 

(196,733)

Dividends declared:

 

 

 

 

 

  

 

 

 

Common, $0.43 per share

 

 

 

 

(23,248)

 

  

 

 

 

(23,248)

Common stock activity under employee stock plans

 

21,481

 

21

 

293

 

 

  

 

 

 

314