Community Bank System Reports Record First Quarter Results

- EPS improvement of 8%, year-over-year

- Achieved record levels of non-interest income generation

- Continued strong asset quality

Business Wire

SYRACUSE, N.Y.--(BUSINESS WIRE)--

Community Bank System, Inc. (CBU) reported first quarter 2014 net income of $22.2 million, an increase of 9.5% compared with $20.2 million earned for the first quarter of 2013. Diluted earnings per share totaled $0.54 for the first quarter of 2014, up 8.0% from $0.50 reported in the first quarter of 2013. First quarter 2014 net income and noninterest income were the highest quarterly amounts ever recorded by the Company.

Total revenue for the first quarter of 2014 was $88.5 million, an increase of $3.9 million, or 4.7%, over the first quarter of 2013. Higher revenue resulted from an eight-basis point increase in the Company’s net interest margin to 3.94%, primarily related to a significant decline in borrowing costs resulting from balance sheet repositioning actions in 2013. Additionally, continued organic growth drove a $1.4 million, or 10.7% increase in the Company’s revenue from its wealth management and employee benefit services businesses. Banking fee income from deposit services and mortgage banking, increased $0.8 million year-over-year, while linked quarter revenues were lower, as seasonally expected. Revenue growth was supported by an increased core deposit account base resulting from solid organic growth in addition to the successful integration of eight Bank of America branches acquired in Pennsylvania in late 2013. The quarterly provision for loan losses of $1.0 million was $0.4 million lower than the first quarter of 2013, reflective of lower net charge-offs and the continuation of generally stable and favorable asset quality metrics. Total operating expenses of $55.9 million for the quarter were $1.4 million, or 2.5%, higher than the first quarter of 2013, driven by the additional operating costs associated with the completed Bank of America branch acquisitions and atypically higher seasonal maintenance and utility costs.

“Community Bank’s trend of solid execution continued again in 2014’s first quarter, with strong operating results demonstrating the strength of our diversified franchise,” said President and Chief Executive Officer Mark E. Tryniski. “The momentum from our successful balance sheet initiatives and branch acquisitions in 2013 were catalysts for improved results as we began 2014. Our employee benefit services and wealth management groups delivered record earnings on robust growth in existing and new customer relationships. Loans and deposits grew from year-ago levels, while strong asset quality continued to reflect the strength of our underwriting and stable economic trends in our markets. In 2014 we continue to focus on executing our long-term approach to value creation for the benefit of our shareholders.”

First quarter 2014 net interest income was $60.1 million, an increase of $1.7 million, or 2.9%, compared to the first quarter of 2013. In addition to the $0.9 million benefit to interest expense from continued deposit growth and an improved funding mix, growth in net interest income was driven by a $5.5 million decrease in borrowing interest expense resulting from last year’s balance sheet repositioning actions. These actions effectively lowered the cost of borrowed funds by 286 basis points and contributed to a $283.9 million decline in average borrowed funds year-over-year. Improved funding costs were partially offset by a 31-basis point decline in earning asset yields, driven by lower blended interest rates on loans and investment securities. While average loan balances grew $239.1 million, or 6.2%, average loan yields declined 43 basis points year-over-year, resulting in a $1.4 million reduction in loan income. Investment income fell $3.3 million largely due to the Company’s balance sheet repositioning actions in 2013, which resulted in average investment securities balances (including cash equivalents) falling by $222.5 million compared to the prior year’s first quarter, while yields fell 23 basis points.

First quarter non-interest income increased $2.3 million to $28.4 million, representing an increase of 8.6% compared to last year’s first quarter. Income expanded across all banking and financial services categories. Financial services revenue reached record levels as wealth management revenues increased $0.8 million, or 21.0% over first quarter 2013, while employee benefit services revenue grew 6.8% to $10.4 million. Strong customer expansion and market momentum from 2013 drove the improved performance. Deposit service revenues grew $0.7 million, or 5.7%, to $12.3 million, reflecting meaningful core deposit account growth as a result of the branch acquisitions and organic growth initiatives across the franchise.

Quarterly operating expenses of $55.9 million increased $1.4 million, or 2.5%, over the first quarter of 2013. Occupancy and equipment costs grew $0.6 million, or 8.9%, primarily as a result of the December 2013 branch acquisitions as well as higher facility maintenance and utility costs in more severe winter conditions compared to the first quarter of 2013. Salaries and employee benefits grew $0.3 million, or 0.8%, and included the additional personnel from the branch acquisitions as well as merit increases. These increases were partially offset by lower retirement plan expenses related to plan asset performance and discount rate changes. Other expenses further reflected the increased costs of operating an expanded franchise, with acquisition expenses totaling $0.1 million and total other expenses rising $0.4 million, or 2.2%.

The first quarter 2014 effective income tax rate of 29.7% increased compared to 29.2% in last year’s first quarter, reflecting a higher proportion of income being generated from fully taxable sources.

Financial Position

Average earning assets of $6.6 billion for the first quarter of 2014 were essentially flat with the linked and prior year first quarter. Overall average earning asset balances included growth of $30.6 million in average loan balances, while average investment securities and cash balances declined by an offsetting $29.4 million. Lower securities balances reflect the full-quarter impact of fourth quarter 2013 balance sheet actions, including sales of collateralized debt obligation securities and certain Treasury securities. Average deposits increased $238.2 million compared to the fourth quarter of 2013, and were up $258.3 million from the first quarter of 2013, principally from the branch acquisition.

Ending loans at March 31, 2014 increased $234.8 million, or 6.1%, year-over-year, reflecting strong organic growth in the Company’s consumer lending portfolios. Ending loans decreased $12.7 million from December 31, 2013, reflecting normal seasonal fluctuations. Ending investment securities, including cash equivalents, totaled $2.52 billion at March 31, 2014, or $137.9 million lower than March 31, 2013 due to the balance sheet restructuring initiatives undertaken in 2013. Quarter-end borrowings of $217.1 million were $144.3 million lower than the year-ago quarter, also due to the balance sheet restructuring actions and net liquidity from the branch acquisitions. Deposit balances at March 31, 2014 totaled $6.04 billion, up $264.1 million, or 4.6%, from the year-ago quarter. Deposit balances grew $142.8 million from December 31, 2013, and included the expected seasonal increase in municipal funds. Growth across all core deposit categories outpaced declines in time deposit balances.

Shareholders’ equity of $918.1 million at March 31, 2014 was $40.8 million, or 4.7%, higher than the prior year quarter-end, primarily due to strong earnings generation and retention over the last four quarters. The Company’s net tangible equity to net tangible assets ratio was 7.97% at March 31, 2014, up from 7.68% at December 31, 2013. Its Tier 1 leverage ratio grew to 9.48% for the current quarter, up 19 basis points from the fourth quarter of 2013.

Asset Quality

The Company’s asset quality metrics continue to be favorable relative to comparative peer and industry averages and illustrate the long-term effectiveness of the Company’s disciplined risk management and underwriting standards. Net charge-offs were $1.1 million for the first quarter, compared to $2.9 million for the fourth quarter of 2013 and $1.4 million for first quarter of 2013. As an annualized percentage of average loans, net charge-offs measured 0.11% in the first quarter of 2014, compared to 0.29% and 0.14% in the linked and year-ago quarters, respectively. Nonperforming loans as a percentage of total loans at March 31, 2014 were 0.58%, compared to 0.54% at December 31, 2013, and down from 0.71% of total loans at March 31, 2013. The total delinquency ratio of 1.25% at the end of the first quarter was down 24 basis points from the end of 2013 and down 30 basis points from March 31, 2013. The first quarter provision for loan losses of $1.0 million was $2.2 million, or 68.6% lower than the fourth quarter of 2013, and $0.4 million, or 28.2%, lower than the first quarter of 2013. The allowance for loan losses to nonperforming loans was 187% at March 31, 2014, compared to 201% at December 31, 2013 and 157% as of March 31, 2013.

Cash Dividend Declared / Stock Repurchase Authorization

As previously disclosed, in the first quarter of 2014 the Company’s Board of Directors declared a quarterly cash dividend to shareholders of $0.28 per share on its common stock. The dividend was paid on April 10, 2014 to shareholders of record as of March 14, 2014.

Also as previously announced, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2,000,000 shares of the Company’s common stock during a twelve-month period starting January 1, 2014. Such repurchases may be made at the discretion of senior management depending 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. The Company did not repurchase any stock in the first quarter of 2014.

Annual Meeting Scheduled

The Company’s Annual Meeting of Shareholders will be held at 1:00 p.m. (ET) on Wednesday, May 14, 2014 at the DoubleTree by Hilton Hotel in East Syracuse, New York.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Wednesday) April 23, 2014 to discuss first quarter results. The conference call can be accessed at 888-397-5352 (1-719-325-2428 if outside United States and Canada) using the conference ID code 5113627. Investors may also listen live via the Internet at: http://www.videonewswire.com/event.asp?id=98782.

This earnings release, including supporting financial tables, is available within the press releases section of the Company's investor relations website at: http://ir.communitybanksystem.com. An archived webcast of the earnings call will be available on this site for one full year.

Community Bank System, Inc. operates more than 190 customer facilities across Upstate New York and Northeastern Pennsylvania through its banking subsidiary, Community Bank, N.A. With assets of approximately $7.4 billion, the DeWitt, N.Y. headquartered company is among the country's 100 largest financial institutions. In addition to a full range of retail and business banking services, Community Bank System offers comprehensive financial planning and wealth management services and operates a full service insurance agency providing personal and business insurance needs. The Company's Benefit Plans Administrative Services, Inc. subsidiary is a leading provider of employee benefits administration and trust services, actuarial and consulting services to customers on a national scale. Community Bank System, Inc. is listed on the New York Stock Exchange and the Company's stock trades under the symbol CBU. For more information about Community Bank visit www.communitybankna.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following factors, among others, could cause the actual results of CBU’s operations to differ materially from CBU’s expectations: the successful integration of operations of its acquisitions; competition; changes in economic conditions, interest rates and financial markets; and changes in legislation or regulatory requirements. These statements are based on the current beliefs and expectations of CBU’s management and CBU does not assume any duty to update forward-looking statements.

Summary of Financial Data

         
(Dollars in thousands, except per share data)                  
2014 2013
    1st Qtr   4th Qtr   3rd Qtr   2nd Qtr   1st Qtr
Earnings                    
Loan income $45,693 $47,061 $47,606 $46,412 $47,118
Investment income 17,546 18,901 18,526 17,728 20,807
Total interest income 63,239 65,962 66,132 64,140 67,925
Interest expense 3,131 5,326 5,531 5,708 9,500
Net interest income 60,108 60,636 60,601 58,432 58,425
Provision for loan losses 1,000 3,185 2,093 1,321 1,393
Net interest income after provision for loan losses 59,108 57,451 58,508 57,111 57,032
Deposit service fees 12,255 12,714 12,703 12,345 11,595
Mortgage banking revenues 284 562 599 341 171
Other banking services 906 954 1,072 679 867
Wealth management services 4,474 3,984 3,823 4,045 3,698
Employee benefit services 10,435 10,032 9,397 9,397 9,770
Gain on sales of investment securities 0 16,969 0 16,008 47,791
Loss on debt extinguishments 0 (23,836) 0 (15,717) (47,783)
Total noninterest income 28,354 21,379 27,594 27,098 26,109
Salaries and employee benefits 30,740 30,412 30,448 30,286 30,483
Occupancy and equipment 7,691 6,782 6,448 6,750 7,065
Amortization of intangible assets 1,141 1,061 1,089 1,140 1,179
Acquisition expenses 123 2,105 71 0 5
Other 16,226 16,923 16,988 16,200 15,820
Total operating expenses 55,921 57,283 55,044 54,376 54,552
Income before income taxes 31,541 21,547 31,058 29,833 28,589
Income taxes 9,368 6,070 9,069 8,711 8,348
Net income 22,173

15,477

21,989 21,122 20,241
Basic earnings per share $0.55 $0.38 $0.55 $0.53 $0.51
Diluted earnings per share   $0.54   $0.38   $0.54   $0.52   $0.50
Profitability                    
Return on assets 1.23% 0.84% 1.22% 1.21% 1.11%
Return on equity 9.92% 7.04% 10.26% 9.70% 9.18%
Return on tangible equity(3) 16.37% 11.78% 17.57% 16.38% 15.32%
Noninterest income/operating income (FTE) (1) 30.7% 30.5% 30.0% 30.2% 29.5%
Efficiency ratio (2)   59.2%   58.5%   58.6%   59.9%   60.3%
Components of Net Interest Margin (FTE)                    
Loan yield 4.55% 4.61% 4.76% 4.79% 4.98%
Cash equivalents yield 0.25% 0.22% 0.22% 0.26% 0.26%
Investment yield 3.46% 3.54% 3.52% 3.83% 3.79%
Earning asset yield 4.13% 4.20% 4.28% 4.35% 4.44%
Interest-bearing deposit rate 0.19% 0.21% 0.22% 0.24% 0.28%
Borrowing rate 0.90% 1.86% 2.02% 3.36% 3.76%
Cost of all interest-bearing funds 0.25% 0.41% 0.43% 0.46% 0.73%
Cost of funds (includes DDA) 0.20% 0.33% 0.35% 0.38% 0.61%
Net interest margin (FTE) 3.94% 3.88% 3.94% 3.98% 3.86%
Fully tax-equivalent adjustment   $3,834   $3,666   $3,728   $3,644   $4,022
Summary of Financial Data            
(Dollars in thousands, except per share data)                  
2014 2013
      1st Qtr   4th Qtr   3rd Qtr   2nd Qtr   1st Qtr
Average Balances                      
Loans $4,099,828 $4,069,204 $3,985,755 $3,899,744 $3,860,722
Cash equivalents 9,782 11,085 8,644 148,188 83,812
Taxable investment securities 1,833,296 1,861,206 1,833,355 1,565,756 1,965,073
Nontaxable investment securities 638,975 639,199 644,728 642,424 655,694
Total interest-earning assets 6,581,881 6,580,694 6,472,482 6,256,112 6,565,301
Total assets 7,333,082 7,278,167 7,154,796 7,003,823 7,368,906
Interest-bearing deposits 4,736,746 4,546,591 4,511,199 4,581,206 4,581,130
Borrowings 402,548 634,472 589,065 358,627 686,483
Total interest-bearing liabilities 5,139,294 5,181,063 5,100,264 4,939,833 5,267,613
Noninterest-bearing deposits 1,197,922 1,149,873 1,138,039 1,095,774 1,095,256
Shareholders' equity     906,787   872,567   850,238   873,108   893,746
Balance Sheet Data                      
Cash and cash equivalents $153,417 $149,647 $174,205 $148,573 $330,298
Investment securities 2,506,221 2,218,725 2,518,574 2,366,512 2,448,120
Loans:
Business lending 1,246,070 1,260,364 1,214,796 1,225,671 1,222,835
Consumer mortgage 1,579,322 1,582,058 1,570,607 1,527,341 1,480,192
Consumer indirect 755,849 740,002 713,310 663,924 639,560
Home equity 340,760 346,520 348,246 347,335 353,365
Consumer direct 174,357 180,139 178,496 171,727 165,649
Total loans 4,096,358 4,109,083 4,025,455 3,935,998 3,861,601
Allowance for loan losses 44,197 44,319 44,083 43,473 42,913
Intangible assets, net 390,119 390,499 383,735 384,815 385,954
Other assets 295,310 272,229 244,131 228,291 238,013
Total assets 7,397,228 7,095,864 7,302,017 7,020,716 7,221,073
Deposits:
Noninterest-bearing 1,225,977 1,203,346 1,158,013 1,120,683 1,115,417
Non-maturity interest-bearing 3,928,230 3,766,145 3,630,684 3,608,829 3,678,905
Time 884,681 926,553 898,636 940,618 980,502
Total deposits 6,038,888 5,896,044 5,687,333 5,670,130 5,774,824
Borrowings 217,110 141,913 567,116 322,319 361,422
Subordinated debt held by unconsolidated subsidiary trusts 102,103 102,097 102,091 102,085 102,079
Accrued interest and other liabilities 120,991 79,998 79,798 76,151 105,454
Total liabilities 6,479,092 6,220,052 6,436,338 6,170,685 6,343,779
Shareholders' equity 918,136 875,812 865,679 850,031 877,294
Total liabilities and shareholders' equity     7,397,228   7,095,864   7,302,017   7,020,716   7,221,073
Capital                      
Tier 1 leverage ratio 9.48% 9.29% 9.39% 9.43% 8.78%
Tangible equity/net tangible assets (3) 7.97% 7.68% 7.38% 7.43% 7.58%
Diluted weighted average common shares O/S 41,152 41,061 40,850 40,558 40,321
Period end common shares outstanding 40,658 40,431 40,296 40,099 39,989
Cash dividends declared per common share $0.28 $0.28 $0.28 $0.27 $0.27
Book value $22.58 $21.66 $21.48 $21.20 $21.94
Tangible book value(3) $13.79 $12.80 $12.73 $12.35 $13.01
Common stock price (end of period)     $39.02   $39.68   $34.12   $30.85   $29.63
Summary of Financial Data
(Dollars in thousands, except per share data)          
2014 2013
  1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
Asset Quality          
Nonaccrual loans $21,669 $19,473 $21,713 $22,997 $24,806
Accruing loans 90+ days delinquent 1,977 2,555 2,650 1,439 2,560
Total nonperforming loans 23,646 22,028 24,363 24,436 27,366
Other real estate owned (OREO) 4,914 5,060 5,218 5,066 6,838
Total nonperforming assets 28,560 27,088 29,581 29,502 34,204
Net charge-offs 1,122 2,949 1,483 761 1,368
Allowance for loan losses/loans outstanding 1.08% 1.08% 1.10% 1.10% 1.11%
Nonperforming loans/loans outstanding 0.58% 0.54% 0.61% 0.62% 0.71%
Allowance for loan losses/nonperforming loans 187% 201% 181% 178% 157%
Net charge-offs/average loans 0.11% 0.29% 0.14% 0.08% 0.14%
Delinquent loans/ending loans 1.25% 1.49% 1.48% 1.50% 1.55%
Loan loss provision/net charge-offs 89% 108% 147% 173% 102%
Nonperforming assets/total assets 0.39% 0.38% 0.41% 0.42% 0.47%
Asset Quality (excluding loans acquired since 1/1/09)          
Nonaccrual loans $17,756 $16,065 $17,365 $18,272 $19,756
Accruing loans 90+ days delinquent 1,826 2,418 2,471 1,349 2,164
Total nonperforming loans 19,582 18,483 19,836 19,621 21,920
Other real estate owned (OREO) 2,645 2,832 2,767 2,963 3,844
Total nonperforming assets 22,515 21,315 22,603 22,584 25,764
Net charge-offs 1,086 1,956 1,583 604 1,102
Allowance for loan losses/loans outstanding 1.15% 1.15% 1.16% 1.19% 1.21%
Nonperforming loans/loans outstanding 0.52% 0.49% 0.54% 0.55% 0.64%
Allowance for loan losses/nonperforming loans 222% 234% 215% 215% 190%
Net charge-offs/average loans 0.12% 0.21% 0.17% 0.07% 0.13%
Delinquent loans/ending loans 1.17% 1.44% 1.45% 1.44% 1.48%
Loan loss provision/net charge-offs 121% 130% 126% 210% 113%
Nonperforming assets/total assets 0.31% 0.32% 0.33% 0.34% 0.38%
 
(1) Excludes gains and losses on sales of investment securities and debt prepayments.

(2) Excludes intangible amortization, acquisition expenses, litigation settlement charge, gains and losses on sales of investment
securities and losses on debt extinguishments.

(3) Includes deferred tax liabilities (of approximately $32.8 million at 3/31/14) generated from tax deductible goodwill.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following factors, among others, could cause the actual results of CBU’s operations to differ materially from CBU’s expectations: the successful integration of operations of its acquisitions; competition; changes in economic conditions, interest rates and financial markets; and changes in legislation or regulatory requirements. CBU does not assume any duty to update forward-looking statements.

Contact:
Community Bank System, Inc.
Scott A. Kingsley, EVP & Chief Financial Officer
Office: 315-445-3121

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