SYRACUSE, N.Y.--(BUSINESS WIRE)--Community Bank System, Inc. (NYSE: CBU) reported fourth quarter 2020 net income of $46.5 million, or $0.86 per fully-diluted share. This compares to net income of $42.9 million, or $0.82 per share, for the fourth quarter of 2019 and $42.8 million, or $0.79 per share, in the linked third quarter of 2020. The $0.04, or 4.9%, increase in earnings per share year-over-year was driven by an increase in net interest income, a decrease in the provision for credit losses, slightly lower operating expenses and a small increase in noninterest revenues, offset, in part, by higher income taxes and an increase in fully-diluted shares outstanding. The $0.07, or 8.9%, increase in earnings per share from the linked third quarter was driven by an increase in net interest income, a decrease in the provision for credit losses and lower operating expenses, offset, in part, by lower noninterest revenues, higher income taxes and an increase in fully-diluted shares outstanding. Operating diluted earnings per share (non-GAAP), which excludes, on an after-tax basis, acquisition expenses, acquisition-related provision for credit losses, unrealized gain/(loss) on equity securities, net gain on sale of investments, litigation accrual expenses and gain on debt extinguishment, were $0.85 for the fourth quarter of 2020, as compared to $0.83 in the fourth quarter of 2019. Full year 2020 diluted earnings per share were $3.08, as compared to $3.23 in 2019. Full year 2020 diluted operating earnings per share (non-GAAP) of $3.24 were $0.05 per share lower than the $3.29 per share of operating earnings generated in 2019.

2020 Performance Highlights:

• GAAP EPS
  • $0.86 per share for the fourth quarter of 2020, compared to $0.82 per share for the fourth quarter of 2019
  • $3.08 per share for full year 2020, down $0.15 per share from full year 2019
• Operating EPS (non-GAAP)
  • $0.85 per share for the fourth quarter of 2020, up $0.02 per share from the fourth quarter of 2019
  • $3.24 per share for full year 2020, $0.05 per share below 2019
• Adjusted Pre-Tax, Pre-Provision Net Revenue Per Share (non-GAAP)
  • $1.03 per share for the fourth quarter of 2020, compared to $1.06 per share for the fourth quarter of 2019
  • $4.26 per share for full year 2020, $0.03 per share above full year 2019
• Return on Assets
  • 1.33% for the fourth quarter of 2020
  • 1.28% for full year 2020
• Return on Equity
  • 8.82% for the fourth quarter of 2020
  • 8.13% for full year 2020
• Total Deposit Funding Costs
  • 0.12% for the fourth quarter of 2020, down 14 basis points from the fourth quarter of 2019
  • 0.16% for the full year 2020, down 7 basis points from the full year 2019
• Loan Net Charge-Offs
  • 0.07% annualized for the fourth quarter of 2020
  • 0.07% for the full year 2020

“The Company generated very strong earnings results in 2020 despite the significant and persistent challenges posed by the COVID-19 pandemic and related market conditions throughout the year,” said Mark E. Tryniski, President and CEO. “On a full-year basis, the Company generated diluted operating earnings per share of $3.24. These results were only $0.05, or 1.5% lower than full-year 2019 operating earnings per share of $3.29, despite navigating a difficult credit environment, significantly lower market interest rates and substantial growth in the Company’s total assets due to unprecedented levels of Federal stimulus. Strong asset quality leading into the pandemic, a tremendous core deposit base and diversified revenue streams, including year over year revenue increases in the Company’s nonbanking businesses, demonstrated the strength and resiliency of the Company’s business model. Fourth quarter operating earnings per share of $0.85 increased $0.02, or 2.4%, from the prior year’s fourth quarter and matched third quarter 2020 results. The Company’s full year adjusted pre-tax, pre-provision net revenue per share of $4.26, was $0.03 above the full year 2019 results. The strength of our nonbanking businesses became increasingly evident as the pandemic ran its course during 2020. On a full-year basis, the total revenues from our nonbanking business were up $6.4 million, or 4.1%, from $155.2 million in 2019 to $161.6 million in 2020, which helped offset a $4.1 million, or 5.8%, decrease in our banking noninterest revenues driven largely by a year over year decrease in deposit-related fees.”

Mr. Tryniski, continued, “From an asset quality perspective, during the second half of 2020 the Company experienced a significant decrease in the number and outstanding balances of loans under COVID-related forbearance. At December 31, 2020, 74 borrowers, representing $66.5 million of loans outstanding, or 0.9% of total loans, remained under a forbearance agreement. This is down from 216 borrowers, representing $192.7 million of loans outstanding, or 2.6% of total loans, at September 30, 2020 and 3,699 borrowers, representing $704.1 million of loans outstanding, or 9.4% of total loans at June 30, 2020. However, as anticipated, the Company recorded an increase in nonperforming assets during the fourth quarter of 2020, due to the continued pandemic-related financial hardship experienced by certain borrowers. During the quarter, several borrowers that operate in the hospitality, travel and entertainment industries requested extended forbearance agreements to mitigate the ongoing cash flow challenges of their businesses. Although we continued to accommodate reasonable forbearance requests for these borrowers, we determined that loans subject to a third forbearance would be classified as nonaccrual unless the borrower could demonstrate current cash flows or payment reserves to service their pre-forbearance payment obligations. At December 31, 2020, nonperforming loans stood at $76.9 million, or 1.04%, of total loans outstanding. By comparison, nonperforming loans to total loans outstanding were 0.35% at the end of 2019 and 0.43% at the end of the linked third quarter. Although nonperforming loans increased significantly during the fourth quarter, specific reserves identified in the allowance for credit losses against these loans totaled less than $4.0 million, which represents approximately five basis points of potential charge-offs. Net charge-offs to average loans were just seven basis points in 2020, as compared to 12 basis points for 2019. Loans outstanding at the end of the fourth quarter decreased $42.7 million, or 0.6% from the end of the linked third quarter due primarily to Paycheck Protection Program (“PPP”) forgiveness and weaker demand for credit, but were up $525.4 million, or 7.6% over the prior year end due largely to the origination of PPP loans and the second quarter acquisition of Steuben Trust Corporation (“Steuben”). Deposit levels remained elevated during the fourth quarter due primarily to the retention of a significant portion of Federal stimulus-related funds received by customers, and to a lesser extent, the Steuben acquisition. Total deposits increased $2.2 billion, or 24.8%, during 2020 from $8.99 billion at the end of 2019 to $11.22 billion at the end of 2020.”

Mr. Tryniski added, “Although we expect to continue to navigate challenging economic and market conditions during 2021, we believe our Company remains well positioned to perform effectively in the evolving environment. The Company continues to maintain very high levels of capital and liquidity, diversified revenue streams through its nonbanking businesses, a history of strong credit performance and an exceptional core deposit base.”

The Company recorded total revenues of $150.6 million in the fourth quarter of 2020, an increase of $0.8 million, or 0.5%, from the prior year’s fourth quarter. The increase in total revenues between the periods was driven by a $0.7 million, or 0.7%, increase in net interest income, a $1.7 million, or 7.0%, increase in employee benefit services revenues, a $1.0 million, or 7.3%, increase in wealth management and insurance services revenues and a $0.4 million gain on debt extinguishment, offset, in part, by a $2.0 million, or 11.2%, decrease in deposit service and other banking fees and a $1.1 million decrease in mortgage banking income. Total revenues were down $2.0 million, or 1.3%, on a linked quarter basis. The Company recorded a $0.9 million net loss on mortgage banking during the fourth quarter of 2020, as compared to $3.9 million of mortgage banking revenues during the third quarter of 2020, as the Company shifted its strategy from selling the substantial majority of its eligible residential mortgage loans into the secondary market to retaining them in portfolio in the fourth quarter. The decrease in mortgage banking revenue between the linked quarters and a $0.3 million, or 2.1%, decrease in wealth management and insurance services revenues, were partially offset by a $0.5 million, or 0.5%, increase in net interest income, a $0.6 million, or 4.2%, increase in deposit service and other banking fees, a $1.6 million, or 6.3%, increase in employee benefit service revenues, and a $0.4 million gain on debt extinguishment.

The Company recorded net interest income of $93.4 million in the fourth quarter of 2020. This represents a $0.7 million, or 0.7%, increase over the fourth quarter of 2019. The increase was driven by a $2.28 billion, or 22.7%, increase in average earning assets between the periods, offset, in part by a 66 basis point decrease in the net interest margin. The increase in earning assets was driven by large net inflows of funds from government stimulus programs, PPP loan originations and the acquisition of Steuben in the second quarter of 2020. The 66 basis point decrease in net interest margin was driven by an 81 basis point decrease in tax-equivalent earning asset yields between the periods, partially offset by a 17 basis point decrease in the total cost of funds. The large drop in earning asset yields was due to a significant decrease in market interest rates between the periods and a significant change in the composition of earning assets, including a $574.4 million increase in average cash equivalents and a $1.11 billion increase in the book value of investment securities. The tax-equivalent yield on loans decreased 50 basis points between the periods from 4.67% in the fourth quarter of 2019 to 4.17% in the fourth quarter of 2020, while the tax-equivalent yield on investments, including cash equivalents, decreased 86 basis points, from 2.54% in the fourth quarter of 2019 to 1.68% in the fourth quarter of 2020.

Interest income and fees on loans decreased $2.7 million, or 3.3%, over the comparable prior year quarter. Although average loans outstanding increased $592.5 million, or 8.6%, due to the Steuben acquisition and the origination of PPP loans over the comparable prior year’s quarter, the 50 basis point decrease in loan yields resulted in lower interest income on loans. Interest income on investments, including cash equivalents, increased $0.2 million, or 1.1%, between the fourth quarter of 2019 and the fourth quarter of 2020, reflective of the substantial increase in the average balance of investment securities and cash equivalents between the periods, partially offset by an 86 basis point decrease in the tax-equivalent yield on investments, including cash equivalents. Interest expense was $3.1 million lower than the previous year’s fourth quarter, driven by a 22 basis point decrease in the cost of interest-bearing liabilities partially, offset by a $1.31 billion, or 18.9%, increase in average interest-bearing liability balances. The average cost of deposits was 0.12% in the fourth quarter of 2020, as compared to 0.26% in the fourth quarter of 2019, reflective of market-driven rate decreases for deposits between the periods and significant increases in noninterest-bearing deposit balances.

On a linked quarter basis, net interest income increased $0.5 million, driven by a $0.1 million increase in interest income and a $0.4 million decrease in interest expense. Interest income on loans decreased $1.8 million, while interest income on investments and cash equivalents increased $1.9 million due to the purchase of investment securities during the fourth quarter. The average book value of investment securities increased $636.9 million, or 20.2%, during the fourth quarter, while average cash equivalents decreased $221.8 million, or 17.0%. The average cost of deposits decreased one basis point during the fourth quarter from 0.13% in the linked third quarter of 2020 to 0.12% in the fourth quarter.

The Company recorded a $3.1 million net benefit in the provision for credit losses during the fourth quarter of 2020. This compares to a $2.9 million provision for credit losses during the fourth quarter of 2019. The net benefit recorded in the provision for credit losses was driven by several factors, including a $2.0 million reversal of a previously recorded allowance for credit loss on a purchase credit deteriorated loan, a significant improvement in the economic outlook and a substantial decrease in loans under COVID-19 related forbearance agreements, offset, in part, by a substantial, but anticipated, increase in nonperforming assets and the related specific impairment reserves on those nonperforming assets. For comparative purposes, the Company recorded $1.9 million in the provision for credit losses during the third quarter of 2020, $9.8 million in the second quarter of 2020, including $3.2 million of acquisition-related provision for credit losses due the acquisition of Steuben, and $5.6 million of provision for credit losses during the first quarter of 2020. During the first two quarters of 2020, financial conditions deteriorated rapidly as state and local governments shut down a substantial portion of business activities in the Company’s markets and unemployment levels spiked. These conditions drove the Company to build its allowance for credit losses during the first two quarters of 2020 to account for expected life of loan losses in the loan portfolio. During the third quarter, the economic outlook remained unclear as markets were uncertain as to the efficacy, approval and roll-out of a COVID-19 vaccine. With a greater than anticipated decline in actual unemployment levels, as well as the Federal Government’s approval of a COVID-19 vaccine and Congress’ recent approval of additional Federal stimulus funding, the near-term economic forecast improved significantly driving an improvement in the economic outlook and as a result, a reduction in the Company’s allowance for credit losses. The Company recorded net charge-offs of $1.3 million, or 0.07% of average loans annualized, during the fourth quarter. On a full-year basis, the Company recorded net charge-offs of $5.0 million, or 0.07%, of average loans outstanding. Since the ultimate effect the COVID-19 pandemic will have on the Company’s credit losses remains uncertain, the net benefit recorded in the provision for credit losses during the fourth quarter should not be interpreted as a trend or utilized to forecast the provision for, or reversal of, credit losses in future quarters. Any improvements in the economic forecast may be offset by increases in delinquency and nonperforming loan balances in future quarters as COVID-affected borrowers may not resume full payment of contractual amounts upon expiration of their forbearance agreements.

The Company recorded $57.2 million in noninterest revenues in the fourth quarter of 2020, as compared to $57.1 million in the fourth quarter of 2019. This represents a $0.1 million, or 0.1%, increase in noninterest revenues between the periods. This included a $0.4 million gain on debt extinguishment in the fourth quarter of 2020, a $1.7 million, or 7.0%, increase in employee benefit services revenue, a $1.0 million, or 7.3%, increase in wealth management and insurance services revenues, partially offset by a $2.0 million, or 11.2%, decrease in deposit services and other banking fees and a $1.1 million decrease in mortgage banking revenues. During the fourth quarter, the Company redeemed $10.0 million of subordinated debt acquired in connection with the 2019 acquisition of Kinderhook Bank Corp., resulting in a $0.4 million gain on debt extinguishment. The increase in employee benefit services revenues was attributable to increases in plan administration, recordkeeping and trustee fees. The increase in wealth management and insurance revenues were driven by organic growth in those businesses. The decrease in deposit service and other banking fees was due to lower overdraft and other deposit revenues, offset partially by higher debit card interchange revenues. The decrease in mortgage banking revenues, was driven by the Company’s decision to cease selling secondary market eligible residential mortgage loans in the secondary market and retain them in portfolio. This resulted in a $0.9 million loss on mortgage banking activities in the quarter, as compared to revenues of $0.2 million in the fourth quarter of 2019. Noninterest revenues decreased $2.5 million, or 4.1%, on a linked quarter basis. This was driven by a $4.2 million, or 21.8%, decrease in banking-related revenues, including a $4.8 million decrease in mortgage banking revenues, offset, in part by a $0.7 million, or 4.2%, increase in deposit service and other banking revenues. Wealth management and insurance services revenues decreased $0.3 million, or 2.1%, between linked quarters, while employee benefit services revenues increased, $1.6 million, or 6.3%.

The Company recorded $94.6 million in total operating expenses in the fourth quarter of 2020, exclusive of $0.4 million of acquisition related expenses. This compares to total operating expenses of $94.4 million in the fourth quarter of 2019, exclusive of $0.8 million of acquisition related expenses. The year-over-year $0.2 million, or 0.2%, increase in operating expenses, exclusive of acquisition related expenses, was attributable to a $1.7 million, or 2.9%, increase in salaries and employee benefits and a $1.5 million, or 13.5%, increase in data processing and communications expenses, offset, in part, by a $2.5 million, or 19.4%, decrease in other expenses and a $0.4 million, or 11.0%, decrease in amortization of intangible assets. The Company recorded $10.1 million of occupancy and equipment expense in both periods. The increase in salaries and benefits expense was driven by merit-related increases in employee wages and a net increase in full-time equivalent employees between the periods, due to both the Steuben acquisition in the second quarter of 2020 and other factors, but were partially offset by lower employee benefit expenses primarily associated with a decrease in employee medical expenses due to reduced provider utilization. The increase in data processing and communications expenses was due to the Steuben acquisition and the implementation of new customer-facing digital technologies and back office systems during 2020. Other expenses were down due to the general decrease in the level of business activities as a result of the COVID-19 pandemic, including travel and entertainment and marketing and business development expenses. Comparatively, the Company recorded $93.2 million of total operating expenses in the linked third quarter of 2020, exclusive of $3.0 million of litigation accrual expenses and $0.8 million of acquisition-related expenses. The increase in operating expenses from the linked quarter, exclusive of litigation accrual and acquisition expenses, was attributable to a $0.9 million, or 1.5%, increase in salaries and employee benefits, a $0.3 million, or 2.6%, increase in data processing and communications expenses and a $0.3 million, or 3.0%, increase in other expenses. The effective tax rate for the fourth quarter of 2020 was 20.9% and 20.1% on a full-year basis, up from 17.1% and 19.2%, respectively, from the equivalent prior year periods.

The Company also provides supplemental reporting of its results on an “operating,” “adjusted” or “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on non-impaired purchased loans, expenses associated with acquisitions, acquisition-related provision for credit losses, litigation accrual expenses, the unrealized gain (loss) on equity securities, gain on debt extinguishment, and net gain on sale of investments. In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which subtracts the provision for credit losses, acquisition expenses, litigation accrual expenses, net gain on sale of investments, unrealized gain (loss) on equity securities and gain on debt extinguishments from income before income taxes. The amounts for such items are presented in the tables that accompany this release. Although these items are non-GAAP measures, the Company’s management believes this information helps investors understand the effect of acquisition and other non-recurring activity in its reported results. Diluted adjusted net earnings per share were $0.89 in the fourth quarter of 2020, as compared to $0.86 in the fourth 2019 and $0.88 in the third quarter of 2020. Adjusted pre-tax, pre-provision net revenue per share was $1.03 in the fourth quarter of 2020, as compared to $1.06 in the fourth quarter of 2019 and $1.10 in the third quarter of 2020.

Financial Position

The Company’s total assets increased to $13.93 billion at December 31, 2020, which represents a $2.52 billion, or 22.1% increase from one year ago and an $85.8 million, or 0.6%, increase over the prior quarter end. The substantial increase in the Company’s total assets during 2020 was largely due to very large inflows of government stimulus-related deposit funding between the periods and the Steuben acquisition in the second quarter of 2020. Similarly, average earning assets increased substantially over the prior year, from $10.04 billion in the fourth quarter of 2019 to $12.31 billion in the fourth quarter of 2020, a $2.28 billion, or 22.7% increase. This included a $592.5 million, or 8.6%, increase in average total loans outstanding, a $1.11 billion, or 41.4%, increase in average total investment securities and a $574.4, or 114%, increase in average cash equivalent balances. On a linked quarter basis, average earning assets increased $356.8 million, or 3.0%, due to net inflows of deposits. The average book value of investment securities increased $636.9 million, or 20.2%, due to the purchase of $1.02 billion of investment securities during the quarter. Average cash equivalents decreased $221.8 million, or 17.0%, due to the purchase of investment securities, offset, in part by the continued growth of deposit liabilities during the quarter. Average loan balances decreased $58.4 million, or 0.8%, due primarily to PPP forgiveness and seasonal decreases in the consumer installment and home equity loans outstanding. Average deposit balances increased $2.11 billion, or 23.2%, between the fourth quarter of 2019 and the fourth quarter of 2020 and $275.9 million, or 2.5%, on a linked quarter basis. Ending loans at December 31, 2020 were $7.42 billion, $42.7 million, or 0.6%, lower than linked third quarter ending loans of $7.46 billion, but up $525.4 million, or 7.6% from one year prior. The growth in ending loans year over year was driven by the acquisition of $339.7 million of Steuben loans in the second quarter of 2020 and the $470.7 million net increase in PPP loans between the periods.

The Company’s liquidity position remains strong. The Company’s Banking subsidiary, Community Bank, N.A. (the “Bank”) maintains a funding base largely comprised of core noninterest-bearing demand deposit accounts and low cost interest-bearing interest checking, savings and money market deposit accounts with customers that operate, reside or work within its branch footprint. At December 31, 2020, the Company’s cash and cash equivalents balances, net of float, were $1.57 billion. The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly-liquid U.S. Treasury securities, highly-rated municipal securities and U.S. agency mortgage-backed securities. At December 31, 2020, the Company’s available-for-sale investment securities portfolio totaled $3.55 billion, $1.78 billion of which was unpledged as collateral. Net unrealized gains on the portfolio at that time were $120.1 million. The Bank’s unused borrowing capacity at the Federal Home Loan Bank of New York at December 31, 2020 was $1.66 billion and it maintained $256.2 million of funding availability at the Federal Reserve Bank’s discount window.

Although there remains uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, the Company’s management believes that its financial position, including high levels of capital, will allow it to successfully endure the negative economic impacts of the crisis. The Company’s capital planning and management activities, coupled with its historically strong earnings performance, diversified streams of revenue and prudent dividend practices, have allowed it to build and maintain strong capital reserves. Shareholders’ equity of $2.10 billion at December 31, 2020 was $248.9 million, or 13.4%, higher than one year prior and was up $5.4 million, or 0.3%, from the end of the linked third quarter. The increase in shareholders’ equity over the last four quarters was primarily driven by solid earnings generation and capital retention, as well as the Steuben acquisition and an increase in accumulated other comprehensive income due primarily to an increase in net unrealized gains on the Company’s available-for-sale investment securities portfolio. At December 31, 2020, all of the Company’s regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the Company’s tier 1 leverage ratio, a common measure to evaluate a financial institutions capital strength, was 10.16% at December 31, 2020, which represents over two times the regulatory well-capitalized standard of 5.0%. This compares to 10.80% at the end of the fourth quarter of 2019 and 10.21% at the end of the third quarter of 2020. The Company’s net tangible equity to net tangible assets ratio was 9.92% at December 31, 2020, down slightly from 10.01% a year earlier and unchanged from the end of the third quarter of 2020. The modest declines in the net tangible equity to net tangible assets ratio and the tier 1 leverage ratio from one year prior was primarily due to the organic asset growth generated from the significant deposit inflow noted previously and an increase in intangible assets.

As previously announced in December 2020, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.68 million shares of the Company’s common stock during a twelve-month period starting January 1, 2021. Such repurchases may be made at the discretion of the Company’s senior management based on market conditions and other relevant factors and will be acquired through open market or privately negotiated transactions as permitted under Rule 10b-18 of the Securities Exchange Act of 1934 and other applicable legal requirements. There were no shares repurchased pursuant to the 2020 stock repurchase program in the fourth quarter of 2020.

Allowance for Credit Losses and Asset Quality

During the first quarter of 2020, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses, also known as Current Expected Credit Losses (“CECL”). Upon the adoption of CECL on January 1, 2020, the Company’s allowance for credit losses increased $1.4 million, from $49.9 million at December 31, 2019 to $51.3 million. Following the adoption of CECL, the Company’s allowance for credit losses has increased by $9.6 million, or 18.7%, $3.6 million of which was due to the Steuben acquisition and $6.0 million of which was primarily due to credit loss expectations associated with COVID-19’s adverse impact on economic and business operating conditions and specific reserves on impaired loans. The table below illustrates the Company’s changes in the allowance for credit losses just prior to CECL adoption through the end of 2020.