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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 September 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 October 31, 2022: 53,734,397 shares

TABLE OF CONTENTS

Part I.

    

Financial Information

    

Page

Item 1.

Financial Statements (Unaudited)

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

3

Consolidated Statements of Income Three and nine months ended September 30, 2022 and 2021

4

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

5

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

6

Consolidated Statements of Cash Flows Nine months ended September 30, 2022 and 2021

8

Notes to the Consolidated Financial Statements September 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

56

Item 4.

Controls and Procedures

58

Part II.

Other Information

Item 1.

Legal Proceedings

58

Item 1A.

Risk Factors

58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

60

2

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, 

2022

    

2021

Assets:

  

 

  

Cash and cash equivalents

$

247,391

$

1,875,064

Available-for-sale investment securities includes pledged securities that can be sold or repledged of $427,164 and $485,414, respectively (cost of $6,136,544 and $4,980,102, respectively)

 

5,170,689

 

4,934,210

Equity and other securities (cost of $55,665 and $43,917, respectively)

 

56,603

 

44,879

Loans, net

 

8,543,607

 

7,373,639

Allowance for credit losses

 

(60,363)

 

(49,869)

Net loans

 

8,483,244

 

7,323,770

 

Goodwill

 

844,984

 

799,109

Core deposit intangibles, net

 

13,550

 

9,087

Other intangibles, net

 

50,690

 

56,139

Goodwill and intangible assets, net

 

909,224

 

864,335

Premises and equipment, net

161,966

160,651

Accrued interest and fees receivable

 

41,627

 

35,894

Other assets

 

523,803

 

313,854

Total assets

$

15,594,547

$

15,552,657

 

 

Liabilities:

Noninterest-bearing deposits

$

4,281,859

$

3,921,663

Interest-bearing deposits

 

9,204,462

 

8,989,505

Total deposits

 

13,486,321

 

12,911,168

Overnight borrowings

 

119,800

 

0

Securities sold under agreement to repurchase, short-term

 

352,772

 

324,720

Other Federal Home Loan Bank borrowings

 

19,472

 

1,888

Subordinated notes payable

 

3,256

 

3,277

Accrued interest and other liabilities

 

151,763

 

210,797

Total liabilities

 

14,133,384

 

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; 54,188,008 and 54,092,421 shares issued, respectively

 

54,188

 

54,092

Additional paid-in capital

 

1,048,444

 

1,041,304

Retained earnings

 

1,123,641

 

1,058,286

Accumulated other comprehensive loss

 

(746,381)

 

(50,627)

Treasury stock, at cost (451,992 shares, including 134,477 shares held by deferred compensation arrangements at September 30, 2022 and 214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021, respectively)

 

(26,426)

 

(10,610)

Deferred compensation arrangements (134,477 and 146,860 shares, respectively)

 

7,697

 

8,362

Total shareholders’ equity

 

1,461,163

 

2,100,807

Total liabilities and shareholders’ equity

$

15,594,547

$

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

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Interest income:

 

  

 

  

 

  

 

  

Interest and fees on loans

$

88,434

$

75,825

$

238,907

$

231,446

Interest and dividends on taxable investments

 

23,737

 

17,361

 

71,228

 

49,325

Interest and dividends on nontaxable investments

 

3,704

 

2,480

 

9,611

 

7,920

Total interest income

 

115,875

 

95,666

 

319,746

 

288,691

Interest expense:

 

 

 

 

Interest on deposits

 

3,855

 

2,822

 

9,111

 

8,897

Interest on borrowings

 

1,588

 

195

 

2,113

 

716

Interest on subordinated notes payable

 

38

 

38

 

115

 

115

Interest on subordinated debt held by unconsolidated subsidiary trusts

 

0

 

0

 

0

 

293

Total interest expense

 

5,481

 

3,055

 

11,339

 

10,021

Net interest income

 

110,394

 

92,611

 

308,407

 

278,670

Provision for credit losses

 

5,061

 

(944)

 

12,005

 

(11,001)

Net interest income after provision for credit losses

 

105,333

 

93,555

 

296,402

 

289,671

Noninterest revenues:

 

 

 

 

Deposit service fees

 

17,452

 

15,442

 

49,745

 

43,758

Mortgage banking

171

 

460

 

595

 

1,479

Other banking services

 

912

 

996

 

2,521

 

2,830

Employee benefit services

 

27,884

 

29,923

 

86,385

 

83,933

Insurance services

 

11,332

 

9,176

 

31,521

 

25,538

Wealth management services

 

7,502

8,322

24,276

24,748

Unrealized (loss) gain on equity securities

 

(4)

 

(10)

 

(24)

 

14

Total noninterest revenues

 

65,249

 

64,309

 

195,019

 

182,300

Noninterest expenses:

 

 

 

 

Salaries and employee benefits

 

66,190

 

62,883

 

193,236

 

178,407

Occupancy and equipment

 

10,364

 

9,867

 

31,740

 

31,437

Data processing and communications

 

14,184

 

12,966

 

40,454

 

38,123

Amortization of intangible assets

 

3,837

 

3,703

 

11,420

 

10,300

Legal and professional fees

 

3,194

 

3,352

 

10,196

 

8,885

Business development and marketing

 

3,616

 

2,383

 

9,975

 

7,071

Litigation accrual

0

(100)

0

(100)

Acquisition expenses

409

102

4,668

133

Acquisition-related contingent consideration adjustment

0

0

400

0

Other expenses

 

6,391

 

5,280

16,327

 

12,969

Total noninterest expenses

 

108,185

 

100,436

318,416

 

287,225

Income before income taxes

 

62,397

 

57,428

173,005

 

184,746

Income taxes

 

13,706

 

12,092

37,454

 

38,616

Net income

$

48,691

$

45,336

$

135,551

$

146,130

Basic earnings per share

$

0.90

$

0.84

$

2.51

$

2.70

Diluted earnings per share

$

0.90

$

0.83

$

2.49

$

2.68

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

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Pension and other post retirement obligations:

  

 

  

 

  

 

  

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

$

220

$

911

$

660

$

2,733

Tax effect

 

(53)

 

(219)

 

(160)

 

(657)

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

 

167

 

692

 

500

2,076

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

 

109

 

50

 

327

 

150

Tax effect

 

(26)

 

(12)

 

(79)

 

(36)

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

 

83

 

38

 

248

 

114

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

 

250

 

730

 

748

 

2,190

Unrealized losses on available-for-sale securities:

 

 

 

 

Net unrealized losses arising during period, gross

 

(301,023)

 

(21,268)

 

(919,962)

 

(168,621)

Tax effect

 

73,119

 

5,112

 

223,460

 

40,528

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

 

(227,904)

 

(16,156)

 

(696,502)

 

(128,093)

Other comprehensive loss, net of tax

 

(227,654)

 

(15,426)

 

(695,754)

 

(125,903)

Net income

 

48,691

 

45,336

 

135,551

 

146,130

Comprehensive (loss) income

$

(178,963)

$

29,910

$

(560,203)

$

20,227

As of

September 30, 

December 31, 

    

2022

    

2021

Accumulated Other Comprehensive Loss By Component:

  

Unrealized loss for pension and other post-retirement obligations

  

$

(19,637)

$

(20,624)

Tax effect

  

 

4,915

 

5,154

Net unrealized loss for pension and other post-retirement obligations

  

 

(14,722)

 

(15,470)

Unrealized loss on available-for-sale securities

  

 

(965,855)

 

(45,893)

Tax effect

  

 

234,196

 

10,736

Net unrealized loss on available-for-sale securities

  

 

(731,659)

 

(35,157)

Accumulated other comprehensive loss

  

$

(746,381)

$

(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 September 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 June 30, 2022

 

53,734,027

$

54,185

$

1,046,303

$

1,098,664

$

(518,727)

$

(26,369)

$

7,640

$

1,661,696

Net income

 

 

 

 

48,691

 

 

 

 

48,691

Other comprehensive loss, net of tax

 

 

 

 

 

(227,654)

 

 

 

(227,654)

Dividends declared:

 

 

 

 

 

  

 

 

 

Common, $0.44 per share

 

 

 

 

(23,714)

 

  

 

 

 

(23,714)

Common stock activity under employee stock plans

 

2,892