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Community Bank System Is Poised for a Rebound in 2021

By Asit Sharma - Updated Jan 25, 2021 at 4:39PM

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The company offers an attractive total return opportunity for small bank enthusiasts.

DeWitt, New York-headquartered Community Bank System (CBU 1.57%), closed out 2020 one-more-earnings period removed from worst-case scenarios in the wake of the COVID-19 pandemic. The company's fourth-quarter 2020 report, issued Monday, demonstrated slight but tangible year-over-year revenue and net income growth. 

The company's filing revealed a stronger loan portfolio that reflects declining default risk, though many of its loan clients are still struggling within a larger economy that hasn't yet rebounded from the pandemic. Community Bank System also raised its annual dividend and instituted an aggressive share-repurchase program for 2021. The company's stock shed 12% last year in a difficult period for the banking industry, and though investors still appear wary over bank stocks in general, the bank can certainly reward patient investors in the coming quarters -- especially those seeking total return. 

A banker smiles while reading loan documents as a couple waits to sign a loan.

Image source: Getty Images.

Decent earnings against a COVID-19 backdrop

Community Bank System generated $46.5 million in net income in the fourth quarter against $42.9 million in the fourth quarter of 2019. Diluted earnings per share of $0.86 increased roughly 5% against the $0.82 per share earned in the prior-year period. Total revenue edged up by 0.5% to $150.6 million, with both interest income and non-banking businesses registering slight year-over-year advances.

The bank recorded a $3.1 million benefit in its provision for credit losses during the quarter. Management cited several factors behind the benefit, including a $2.0 million reversal on a loss provision for a deteriorated loan, as well as "a significant improvement in the economic outlook" and a reduction in the number of loans under COVID-19 forbearance agreements. The benefit revises the company's allowance for credit losses down to $60.9 million on a total loan portfolio of $7.4 billion.

Though Community Banking System is seeing an expected rise in non-performing loans, overall, its credit exposure appears to be improving. Total loans under COVID-19-related forbearance agreements up to Dec. 31, 2020 stand at $66.5 million spread among 74 borrowers; this dollar amount represents less than 1% of the company's total loan base. Compare this to June 2020 when the bank had $704.1 million in loans (9% of its total loan portfolio) under forbearance agreements, spread across approximately 3,700 borrowers.

In a sign of the overall credit quality of the bank's loan portfolio, it recorded net charge-offs of $1.3 million during the fourth quarter, or just 0.07% of average loans annualized. Total charge-offs for the entire 2020 year also amounted to 0.07% of average loans annualized.

As for the company's asset base, total assets at the end of the period of $13.9 billion represent a 22% increase over the prior-year period. This is due to "very large inflows of government stimulus-related deposit funding" during 2020 as well as assets acquired in June 2020 upon the acquisition of western New York-based Steuben Trust Corporation.

Why this stock is a promising choice for bank stock investors in 2021

Community Bank System's shares were down roughly 4% in late afternoon trading on Monday, though they've already gained 9% in value year to date. While management isn't providing forward-earnings guidance, shareholders have reason to feel confident in the bank's prospects this year. The company's diversified, non-banking revenue streams (which include wealth management, insurance, mortgage lending, and employee benefit services) should gain some momentum over the next few quarters as the U.S. economy rebounds. And the bank's growing asset base and healthy credit portfolio point to opportunities for improving interest income in 2021.

For dividend investors, Community Bank System fulfilled expectations in the fourth quarter by raising its quarterly dividend by 2.4% to $0.42. At current share price, the company's dividend sports an enticing annualized yield of 2.5%. The organization has a superior track record regarding payouts to shareholders: The current year will mark its 28th consecutive year of dividend increases.

Management is also planning to reward shareholders in 2021 through a significant stock-buyback plan. Last month, the company's board authorized a twelve-month share-repurchase program of 2.68 million shares. At today's stock price, this will require roughly $183 million to complete, which is quite reasonable -- Community Bank System holds roughly $1.5 billion in cash on its balance sheet. If completely executed, the repurchase program will reduce the company's outstanding shares by a significant 5%. Between its earnings potential, steady dividend increases, and outsized share buybacks, this attractive banking stock, which trades at a reasonable 23 times forward earnings, has every opportunity to rebound further as economic conditions brighten in 2021. 

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Community Bank System, Inc.
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