munity Bank System(CBU) - 2022 Q3 - Quarterly Report

Part I. Financial Information This section provides the company's unaudited financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) The unaudited financial statements for Q3 and YTD September 2022 show increased net interest income, decreased net income, and a significant decline in shareholders' equity due to unrealized losses Consolidated Statements of Condition Total assets slightly increased to $15.59 billion, while shareholders' equity significantly declined to $1.46 billion due to accumulated other comprehensive loss Consolidated Statements of Condition (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $247,391 | $1,875,064 | | Net loans | $8,483,244 | $7,323,770 | | Available-for-sale investment securities | $5,170,689 | $4,934,210 | | Goodwill | $844,984 | $799,109 | | Total assets | $15,594,547 | $15,552,657 | | Liabilities | | | | Total deposits | $13,486,321 | $12,911,168 | | Total liabilities | $14,133,384 | $13,451,850 | | Shareholders' Equity | | | | Retained earnings | $1,123,641 | $1,058,286 | | Accumulated other comprehensive loss | $(746,381) | $(50,627) | | Total shareholders' equity | $1,461,163 | $2,100,807 | Consolidated Statements of Income Q3 2022 net income increased to $48.7 million due to higher net interest income, while YTD net income decreased to $135.6 million primarily from a credit loss provision Consolidated Statements of Income (in thousands, except per-share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $110,394 | $92,611 | $308,407 | $278,670 | | Provision for credit losses | $5,061 | $(944) | $12,005 | $(11,001) | | Noninterest revenues | $65,249 | $64,309 | $195,019 | $182,300 | | Noninterest expenses | $108,185 | $100,436 | $318,416 | $287,225 | | Net income | $48,691 | $45,336 | $135,551 | $146,130 | | Diluted earnings per share | $0.90 | $0.83 | $2.49 | $2.68 | Consolidated Statements of Comprehensive Income (Loss) The company reported a significant comprehensive loss for Q3 and YTD September 2022, primarily driven by large unrealized losses on available-for-sale securities - A significant comprehensive loss of $(560.2) million for the first nine months of 2022 was primarily driven by $(696.5) million in after-tax unrealized losses on available-for-sale securities[13] Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased from $2.10 billion to $1.46 billion, primarily due to a significant other comprehensive loss from unrealized securities losses and cash dividends - For the nine months ended September 30, 2022, shareholders' equity decreased by $639.6 million, driven by a $(695.8) million other comprehensive loss and $70.2 million in dividends, partially offset by $135.6 million in net income[23] - The company repurchased 250,000 shares for $16.4 million during the first nine months of 2022[23] Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash provided by operating activities was $143.0 million, while net cash used in investing activities was $(1.89) billion, leading to a total decrease in cash of $(1.63) billion Consolidated Statements of Cash Flows (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $143,036 | $153,024 | | Net cash used in investing activities | $(1,885,169) | $(866,809) | | Net cash provided by financing activities | $114,460 | $1,390,641 | | Change in cash and cash equivalents | $(1,627,673) | $676,856 | Notes to the Consolidated Financial Statements The notes detail key events like the Elmira Savings Bank acquisition, loan portfolio growth, increased allowance for credit losses, and significant unrealized losses in the investment portfolio due to rising interest rates - On May 13, 2022, the Company acquired Elmira Savings Bank for $82.2 million in cash, acquiring $579.0 million in assets, including $437.0 million in loans, and recognizing $45.8 million in preliminary goodwill[30] - The allowance for credit losses to total loans ratio was 0.71% at September 30, 2022, up from 0.68% at year-end 2021, driven by a weaker economic forecast and loan growth, including a $3.9 million acquisition-related provision for the Elmira deal[88] - The investment portfolio had a net unrealized loss of $965.9 million as of September 30, 2022, a significant increase from a loss of $45.9 million at year-end 2021, primarily due to changes in interest rates[61][64] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and YTD 2022 financial performance, highlighting increased net interest income, decreased YTD net income due to credit loss provisions, loan growth from acquisitions, and a significant decline in shareholders' equity - Q3 2022 diluted EPS was $0.90, an 8.4% increase from Q3 2021, driven by a 19.2% rise in net interest income. YTD 2022 diluted EPS was $2.49, down from $2.68 in the prior year, mainly due to a $23.0 million negative swing in the provision for credit losses[143][146] - The acquisition of Elmira Savings Bank on May 13, 2022, for $82.2 million in cash added approximately $579.0 million in assets, including $437.0 million in loans and $522.3 million in deposits[145] - The net interest margin for Q3 2022 was 3.03%, an increase of 29 basis points from Q3 2021, as the yield on interest-earning assets rose 35 basis points[164] - Total loans grew 17.3% YoY to $8.54 billion, driven by the Elmira acquisition and organic growth across all loan categories, despite a $156.2 million decrease in PPP loans[203] - The allowance for credit losses to total loans ratio increased to 0.71% from 0.68% at year-end 2021, reflecting loan growth and a weaker economic forecast. The provision for credit losses was $5.1 million in Q3 2022, compared to a benefit of $(0.9) million in Q3 2021[221] - Total shareholders' equity declined by $639.6 million since year-end 2021 to $1.46 billion, primarily due to a $695.7 million other comprehensive loss from the mark-to-market impact on the available-for-sale securities portfolio[231] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, managed via NII simulation models, which project short-term NII decreases in both rising and falling rate scenarios Net Interest Income Sensitivity Model (as of Sep 30, 2022) | Interest Rate Scenario | Change in Projected NII (in thousands) | Change in Projected NII (%) | | :--- | :--- | :--- | | +300 basis points | ($8,243) | (1.8%) | | +200 basis points | ($5,702) | (1.2%) | | +100 basis points | ($3,217) | (0.7%) | | -100 basis points | ($763) | (0.2%) | | -200 basis points | ($2,455) | (0.5%) | | -300 basis points | ($9,804) | (2.1%) | - The primary tool for managing interest rate risk is an income simulation model. The model as of Q3 2022 shows short-term NII sensitivity to both rising and falling rates, with projected NII decreasing in all scenarios over the next 12 months[259][267] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[271] - No material changes were made to the internal control over financial reporting during the quarter ended September 30, 2022[272] Part II. Other Information This section covers legal proceedings, risk factors, equity security sales, and other miscellaneous disclosures Legal Proceedings The company is subject to various legal proceedings, but management does not anticipate a material impact on its consolidated financial position - Management does not expect pending or threatened litigation to have a material impact on the Company's consolidated financial position[273] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K or Quarterly Report on Form 10-Q were reported - No material changes in risk factors were reported from previous filings[274] Unregistered Sales of Equity Securities and Use of Proceeds The company has a stock repurchase program for up to 2.70 million shares, but no shares were repurchased under this plan in Q3 2022 - The Board approved a stock repurchase program for up to 2.70 million shares for 2022. No shares were repurchased under this plan in Q3 2022[277] Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Publicly Announced Plan | Max Shares Remaining Under Plan | | :--- | :--- | :--- | :--- | :--- | | July 1-31, 2022 | 903 | $63.64 | 0 | 2,447,000 | | August 1-31, 2022 | 0 | $0.00 | 0 | 2,447,000 | | September 1-30, 2022 | 0 | $0.00 | 0 | 2,447,000 | Defaults Upon Senior Securities This section is not applicable for the current reporting period - Not applicable[282] Mine Safety Disclosures This section is not applicable for the current reporting period - Not applicable[283] Other Information This section is not applicable for the current reporting period - Not applicable[284] Exhibits This section lists the exhibits filed with the Form 10-Q, including employment agreements, retirement agreements, and CEO/CFO certifications - Exhibits filed include amendments to employment agreements for Dimitar Karaivanov and a retirement agreement for Joseph F. Serbun[286] - Certifications by the CEO and CFO pursuant to Sarbanes-Oxley Sections 302 and 906 are included as exhibits[286]