Community Bank’s Q2 net income edges up 1 percent

Adjusted EPS beats analysts’ expectations

DeWITT — Community Bank System, Inc. (NYSE: CBU) recently reported that its net income edged up 1 percent to $45 million in the second quarter from $44.6 million in the second quarter of 2018. 

The DeWitt–based banking company’s earnings per share (EPS) was unchanged at 86 cents. But its adjusted net EPS was 84 cents in the second quarter, down nearly 7 percent from 90 cents in the second quarter of 2018. That resulted almost entirely from a decrease in noninterest banking revenue due primarily to the impact of the Durbin amendment, a provision of federal law that limits the fees that banks can charge retailers for processing debit-card transactions.

Community Bank’s adjusted net EPS of 84 cents beat analysts’ expectations of 80 cents in EPS, according to Zacks Equity Research.

“This quarterly report represents an earnings surprise of 5 percent. A quarter ago, it was expected that this bank holding company would post earnings of 76 cents per share when it actually produced earnings of 85 cents, delivering a [positive] surprise of [nearly 12 percent], Zacks said in a research note.

Over the past four quarters, Community Bank has topped consensus EPS estimates each time, Zacks said.

“Our second quarter operating results reflect another solid and productive performance characterized by consistent and effective execution of our ongoing business strategy,” said Mark E. Tryniski, Community Bank System’s president and CEO, said in the banking company’s earnings report. “Solid execution by both our core banking and financial services businesses worked to offset a $0.05 reduction in earnings per share related to the Durbin debit interchange price restrictions, which became effective for the Company in the third quarter of 2018. Although the yield curve has flattened, the Company recorded a $1.5 million, or 1.7 percent, increase in net interest income over the prior year second quarter. Earning asset yields were up 15 basis points from the prior year second quarter, while funding costs increased nine basis points, resulting in a seven-basis point improvement in net interest margin over the second quarter of 2018.”

Acquisition closes

Tryniski added that Community Bank System closed its acquisition of Kinderhook Bank Corp., parent company of The National Union Bank of Kinderhook, on July 12, and the companies were operationally integrated over that same weekend. It had first announced the deal in the first quarter of this year.

“The transaction extends our banking footprint into the attractive Capital District markets which are similar to the other Upstate New York markets in which we are a strong competitor. It also complements the commitment we made in 2018 when we added an experienced commercial banking team focused on the greater Albany area. We welcome the employees of the former Kinderhook franchise into the Community Bank family and look forward to serving the needs of our customers in those markets for years to come,” Tryniski said in the earnings report.

Earnings details

Community Bank’s total revenue in the second quarter of 2019 was $149 million, up 3.9 percent from the second quarter of 2018. The banking company recorded a $1.5 million, or 1.7 percent, increase in net interest income and a $4.1 million, or 7.3 percent, rise in noninterest revenue between comparable quarters. The increase in net interest income was driven by an uptick in the yield on earning assets, offset, in part by higher funding costs, the earnings report explained. 

The banking company’s increase in noninterest revenue was largely due to the recognition of realized gains on its investment securities portfolio. During the second quarter, Community Bank sold $590 million of its available-for-sale Treasury securities with a remaining maturity of less than five years, which generated net realized gains of $4.9 million, it said. The securities were sold when interest rates on the short-end of the yield curve “dropped precipitously, providing an opportunity to hold the proceeds in higher yielding interest-earning cash until more attractive securities reinvestment options become available.” 

In addition, Community Bank System said its revenue rose in all three of its nonbanking fee-based businesses: employee-benefit services, wealth management, and insurance, by a total of $2.2 million, or 6.1 percent. 

Deposit service fees decreased by $3 million, or 15.7 percent, including a $3.5 million decline due to Durbin Amendment-mandated price restrictions on debit-interchange fees for banks with over $10 billion in total assets. That was slightly offset by a $0.5 million increase in other deposit-related fees. 

Community Bank System recorded a $1.4 million provision for loan losses in the second quarter. This was $1 million less than the amount it recorded in the second quarter of 2018, and reflected an improvement in the company’s asset-quality metrics between the quarterly periods, the earnings report explained. Its non-performing loan to total loan ratio stood at 0.39 percent at the end of this year’s second quarter, down from 0.47 percent at the end of the second quarter of last year.

The banking company reported total operating expenses of $91.2 million in the second quarter, up 5.9 percent from $86.1 million in the second quarter of 2018. The increase was driven by a $1.1 million rise in acquisition-related expenses associated with the Kinderhook acquisition, a $1.6 million, or 3.1 percent, increase in salaries and employee benefits, and a net increase in all other operating expenses of $2.4 million, it said. 

Community Bank generated net interest income of $88.3 million in the second quarter, up 1.7 percent from the year-ago period. Its net interest margin improved from 3.73 percent in the second quarter of 2018 to 3.8 percent in this year’s second quarter. The latest quarter’s net interest income and net interest margin results were “favorably impacted by a 15-basis point increase in the yield on loans, a 64-basis point increase in the yield on cash equivalents and an eight-basis point increase in investment securities yields, offset, in part, by a nine basis point increase in the cost of funds,” the earnings report stated.

Although the rise in net interest income was largely driven by interest-rate factors, a $44 million increase in average loans outstanding, a higher-yielding asset class than cash equivalents and investment securities, and balance increases in lower-cost funding sources, including checking and savings accounts, also contributed to the rise, the banking company explained. 

Community Bank System recorded income-tax expense of $11.4 million in the second quarter of this year, up from $10.2 million in the year-ago period. The increase was driven by a rise in pre-tax income, including a $4.9 million increase in realized gains on investment securities, and a decrease in income-tax benefits from equity-based compensation. The company’s effective tax rate for this year’s second quarter was 20.2 percent, up from 18.7 percent a year prior. The effective tax rate in the latest quarter, exclusive of equity-based compensation tax benefits was 21.3 percent, as compared to 20.9 percent in the year-earlier quarter. 

Community Bank System reported shareholders’ equity of $1.81 billion at the end of the second quarter, up 9.2 percent from the prior-year period. The banking company’s net tangible equity to net tangible assets ratio was 10.56 percent as of June 30, up from 9 percent a year earlier.

Asset quality

Community Bank posted total net charge-offs of $1.2 million in the second quarter, up from $0.9 million a year prior. Net charge-offs as an annualized percentage of average loans measured 0.08 percent in this year’s second quarter, compared to 0.06 percent in the prior-year period. Nonperforming loans as a percentage of total loans as of June 30, were 0.39 percent, an improvement from 0.47 percent a year ago. 

Community Bank System says it operates 234 branches across upstate New York, northeastern Pennsylvania, Vermont, and western Massachusetts through its banking subsidiary, Community Bank, N.A. With assets of more than $11 billion (including the former Kinderhook), Community Bank is among the nation’s 150 largest financial institutions.