munity Bank System(CBU) - 2022 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Q1 2022, with comparative data, covering key financial positions and performance Consolidated Statements of Condition Total assets grew to $15.63 billion, driven by investment securities and net loans, while liabilities and deposits increased, and shareholders' equity declined due to comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $15,625,883 | $15,552,657 | | Cash and cash equivalents | $1,020,926 | $1,875,064 | | Available-for-sale investment securities | $5,787,158 | $4,934,210 | | Net loans | $7,372,106 | $7,323,770 | | Goodwill | $799,080 | $799,109 | | Total Liabilities | $13,773,780 | $13,451,850 | | Total deposits | $13,317,667 | $12,911,168 | | Total Shareholders' Equity | $1,852,103 | $2,100,807 | Consolidated Statements of Income Net income decreased to $47.1 million due to a credit loss provision and higher noninterest expenses, offsetting revenue growth Quarterly Income Statement Highlights (in thousands, except per-share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Interest Income | $94,872 | $93,954 | | Provision for credit losses | $906 | $(5,719) | | Noninterest Revenues | $65,673 | $58,531 | | Noninterest Expenses | $99,807 | $93,246 | | Net Income | $47,055 | $52,850 | | Diluted EPS | $0.86 | $0.97 | Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $854.1 million, primarily due to substantial investing outflows, partially offset by operating and financing inflows Cash Flow Summary for Three Months Ended March 31 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $51,938 | $61,810 | | Net cash used in investing activities | $(1,261,114) | $(414,982) | | Net cash provided by financing activities | $355,038 | $858,714 | | Change in cash and cash equivalents | $(854,138) | $505,542 | Notes to the Consolidated Financial Statements The notes provide detailed information on accounting policies, financial components, and significant events, including acquisitions and CECL methodology - The company announced a pending acquisition of Elmira Savings Bank for $82.8 million in cash, expected to close in Q2 2022[24] - In Q1 2022, the company completed acquisitions of three insurance agencies for $2.5 million in cash through its subsidiary OneGroup NY, Inc[25] - The company adopted ASU No. 2020-04 regarding reference rate reform (LIBOR transition) on January 1, 2022, with no material impact due to insignificant exposure[44] Segment Income Before Taxes (Q1 2022 vs Q1 2021, in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Banking | $43,901 | $49,654 | | Employee Benefit Services | $10,987 | $10,884 | | All Other | $4,944 | $4,420 | | Total | $59,832 | $64,958 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial condition and operating results, focusing on decreased net income, expense increases, and balance sheet changes - Q1 2022 net income decreased by $5.8 million (11.0%) YoY to $47.1 million, with diluted EPS falling to $0.86 from $0.97, primarily due to a $6.6 million increase in credit loss provision and noninterest expenses[146][150] - Non-GAAP operating net income was $47.3 million, a decrease of 10.5% YoY, and operating EPS was $0.87, down $0.10 from Q1 2021[150] - The company provides supplemental non-GAAP metrics, including 'operating,' 'adjusted,' and 'tangible' results, to help investors measure underlying core performance by excluding items like amortization of intangibles and acquisition expenses[141] Net Interest Income and Margin Net interest income slightly increased, but net interest margin compressed by 30 basis points due to lower asset yields and reduced PPP income Net Interest Margin Analysis | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Interest Income (FTE) | $95.7M | $94.9M | | Avg. Yield on Earning Assets | 2.81% | 3.15% | | Avg. Rate on Interest-Bearing Liabilities | 0.12% | 0.18% | | Net Interest Spread | 2.69% | 2.97% | | Net Interest Margin | 2.73% | 3.03% | - PPP-related interest income was $1.7 million in Q1 2022, significantly lower than the $6.9 million recorded in Q1 2021, contributing to the decline in loan yields[147][161] Noninterest Revenues Noninterest revenues grew strongly by 12.2% to $65.7 million, driven by broad-based increases across services, reflecting organic growth and acquisitions Noninterest Revenues Breakdown (in thousands) | Category | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Employee benefit services | $29,580 | $26,533 | | Deposit service charges and fees | $9,350 | $7,781 | | Insurance services | $10,409 | $8,153 | | Wealth management services | $8,633 | $8,199 | | Total Noninterest Revenues | $65,673 | $58,531 | Noninterest Expenses Noninterest expenses rose 7.0% to $99.8 million, primarily due to higher salaries and benefits, impacting the efficiency ratio Noninterest Expenses Breakdown (in thousands) | Category | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Salaries and employee benefits | $61,648 | $57,632 | | Occupancy and equipment | $10,952 | $11,300 | | Data processing and communications | $12,659 | $12,391 | | Total Noninterest Expenses | $99,807 | $93,246 | - The efficiency ratio (non-GAAP) was 59.6% for Q1 2022, compared to 59.0% for Q1 2021[187][189] Financial Condition Financial condition showed a shift in asset composition, with decreased cash, increased investments, modest loan growth, and a decline in shareholders' equity - Total loans ended Q1 2022 at $7.42 billion, up 0.7% YoY, with underlying growth stronger excluding PPP loans which decreased by $356.4 million[200][201] - The investment securities portfolio grew to $5.83 billion, a 52.0% increase from March 31, 2021, as the company deployed excess cash from deposit inflows into higher-yielding securities[195] - The Tier 1 leverage ratio was 9.09% at March 31, 2022, down from 9.63% a year prior, reflecting asset growth outpacing capital retention[233] - Shareholders' equity decreased by $248.7 million from year-end 2021, driven by a $271.4 million other comprehensive loss due to rising interest rates impacting available-for-sale securities[232] Asset Quality Asset quality remained strong with improved metrics, including a lower allowance for credit losses ratio and decreased nonaccrual loans Key Asset Quality Ratios | Ratio | March 31, 2022 | March 31, 2021 | | :--- | :--- | :--- | | Allowance for credit losses/total loans | 0.68% | 0.75% | | Nonaccrual loans/total loans | 0.43% | 0.99% | | Net charge-offs (annualized) to avg. loans | 0.03% | 0.02% | - The company recorded a $0.9 million provision for credit losses in Q1 2022, compared to a $5.7 million net benefit in Q1 2021, reflecting a stable economic outlook[223] - The allowance for credit losses to nonperforming loans ratio improved to 139% from 73% a year ago, indicating stronger coverage[211][216] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with net interest income being asset sensitive, projected to increase in rising rates and decrease in falling rates Net Interest Income Sensitivity Model (at March 31, 2022) | Interest Rate Scenario | Projected 12-Month NII Change (in thousands) | | :--- | :--- | | +200 basis points | $5,352 | | +100 basis points | $190 | | -100 basis points | $(9,315) | - The company's NII is asset sensitive, with projected income increasing in rising rate scenarios and decreasing in falling rate scenarios, largely due to impact on cash equivalents, new investments, and variable-rate loans[262] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control - Management concluded that disclosure controls and procedures were effective as of March 31, 2022[265] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[266] Part II. Other Information Legal Proceedings The company is subject to various legal proceedings, but management anticipates no material impact on its financial position - Management does not expect pending or threatened litigation to have a material impact on the Company's consolidated financial position[268] Risk Factors This section updates risk factors, highlighting potential adverse effects of macroeconomic conditions like inflation and rising interest rates on financial results - The company's business may be adversely affected by market conditions including high inflation, supply chain disruptions, labor shortages, and geopolitical events[271] - Actions by the Federal Reserve, such as changes in interest rates to combat inflation, are beyond the company's control and could lead to market volatility and affect borrower creditworthiness[273] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 50,000 shares in Q1 2022 at an average price of $70.69 per share under its authorized stock repurchase program Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Plan | | :--- | :--- | :--- | :--- | | Jan 2022 | 8,313 | $71.26 | 7,500 | | Feb 2022 | 32,500 | $70.43 | 32,500 | | Mar 2020 | 10,000 | $71.03 | 10,000 | | Total | 50,813 | $70.69 | 50,000 | - As of March 31, 2022, 2,647,000 shares remained available for repurchase under the authorized program[284] Exhibits This section lists exhibits filed with the Form 10-Q, including employment agreements, CEO and CFO certifications, and XBRL data - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley and Inline XBRL documents[289][290]