Community Bank System Reports Solid Fourth Quarter and Full Year Operating Results

Community Bank System Reports Solid Fourth Quarter and Full Year Operating Results

-Increased cash dividend for the 20thconsecutive year

-Organic loan growth of 7% in 2012


-Acquisition of 19 Upstate NY branches completed during the third quarter

SYRACUSE, N.Y.--(BUSINESS WIRE)-- Community Bank System, Inc. (NYS: CBU) reported fourth quarter 2012 net income of $18.8 million, or $0.47 per share, compared with $19.0 million, or $0.51 per share reported for the fourth quarter of 2011. Current quarter results included $0.5 million of acquisition-related expenses and a $2.5 million litigation settlement charge, or $0.05 per share. The Company reported full year earnings of $77.1 million in 2012, an increase of 5.4% over the year ended December 31, 2011.

"Our fourth quarter and full year operating performance continued to be at very favorable levels and was characterized by solid revenue growth, strong organic loan generation, a continuation of our stable and favorable asset quality profile, and the successful completion of the branch acquisitions announced earlier in the year," said President and Chief Executive Officer Mark E. Tryniski. "We continue to focus on building additional value into our enterprise through selective acquisitions, disciplined lending and a consistent approach to business regardless of economic conditions. In September, we increased our quarterly dividend to $0.27 per share, or 3.8% higher, marking the twentieth consecutive year of dividend increases for the Company. We believe that this demonstrates the Company's commitment to the payment of a meaningful and growing dividend as an important component of providing consistent and favorable long-term returns to our shareholders."

Total revenue for the fourth quarter of 2012 was $86.2 million, an increase of $8.7 million, or 11.2%, compared to the prior year fourth quarter. Net interest income increased 8.8% from the prior year quarter to $60.0 million, the result of an $897 million increase in average interest-earning assets, comprised of an additional $536 million of investment securities (including cash equivalents) and a $361 million increase in average loans, from both organic and acquired sources. On a linked quarter basis, ending loans grew $53.1 million, and consistent with the first three quarters of 2012, primarily in residential mortgage and consumer installment products. Although quarterly net interest income was up 8.8% over the fourth quarter of 2011, the completion of the branch acquisitions (and its associated net liquidity characteristics) in the third quarter of 2012 contributed to a reduction in the Company's net interest margin from 4.06% in the fourth quarter of 2011 to 3.83% in the current quarter, as expected. The fourth quarter's net interest income included the receipt of the Company's semi-annual dividend from the Federal Reserve Bank as well as certain loan-related fees which combined added approximately four basis points to the quarterly net interest margin. On a full year basis the Company's net interest income increased $21.0 million, or 10.0%, in 2012, a product of 15.4% growth in interest-earning assets partially offset by a 19 basis-point decline in the net interest margin.

Fourth quarter non-interest income increased $3.8 million to $26.2 million, compared with fourth quarter 2011, reflecting increased benefits administration and consulting fees, higher deposit services fees, and increased wealth management revenues. Employee benefits administration and consulting revenues were up 19.3% compared to fourth quarter 2011, principally from the December 2011 acquisition of Metro-New York based, CAI Benefits (CAI). Wealth management fees were up $0.6 million, or 21.8% over fourth quarter 2011, driven by solid gains in trust services and asset management. Deposit service fees of $12.6 million were up $1.6 million, or 14.3% from fourth quarter of 2011, and included the activities of the branches acquired in the third quarter.

Fourth quarter core operating expenses (excluding acquisition expenses and the litigation settlement charge) of $53.9 million, increased $6.2 million over the fourth quarter of 2011, and included the recurring operating expenses of the acquired branches as well as CAI. Year-to-date core operating expenses (excluding acquisition expenses and the litigation settlement charge) of $203.5 million were 9.7% higher than 2011, and reflect the aforementioned branch and CAI transactions, as well as the acquisition of the Wilber Corporation in April 2011. The results for the fourth quarter and full-year 2012 included an accrual of $2.5 million with respect to the settlement of a class action lawsuit, similar to other actions filed against more than 100 other financial institutions in the United States over the last three years. The litigation settlement related to the processing of retail debit card transactions and its impact on overdraft fees. The Company had considerable affirmative defenses to the claims, however, the settlement the Company was able to achieve was, in its judgment, a superior outcome for shareholders when measured against the cost and the staff resources required for litigation.

The full year 2012 effective income tax rate of 29.2% was consistent with the 29.4% rate in 2011, reflecting proportionately similar levels of income being generated from fully taxable and non-taxable sources.

Financial Position

Average earning assets for the fourth quarter were $6.67 billion, an increase of $39.0 million compared to third quarter of 2012, and up $897.3 million over the fourth quarter of 2011. Ending loans increased $394.6 million year-over-year, reflecting strong organic growth from consumer mortgage and installment products and loans from the acquired branches. Average investment securities (including cash equivalents) of $2.83 billion for the fourth quarter were down 3.0% from the third quarter, reflective of contractual cash flows. Average deposits increased $167.0 million, or 3.1%, compared to the third quarter of 2012, and were up $835.9 million from the fourth quarter of 2011, principally from the branch transactions. Quarter-end borrowings were $830.1 million, consistent with both the end of the third quarter of 2012 and the end of last year.

Year-end shareholders' equity of $902.8 million was $128.2 million, or 16.6%, higher than December 31, 2011. The year-over-year increase was driven by the January 2012 issuance of 2.1 million additional shares in support of the Company's branch acquisitions completed in the third quarter, appreciation in the available-for-sale investment portfolio, and continued solid growth in retained earnings due to record levels of net income generation. Despite the completion of the branch acquisitions in the third quarter, the Company continued to strengthen its capital position as was evidenced by the 50 basis-point increase in the net tangible equity to net tangible assets ratio from the end of 2011.

Asset Quality

The Company's asset quality metrics continue to be markedly better than 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 $2.6 million for the fourth quarter, compared to $1.7 million for the third quarter of 2012 and $1.8 million for fourth quarter of 2011. Nonperforming loans as a percentage of total loans at December 31, 2012 were 0.75%, down from the 0.81% at September 30, 2012, and down from 0.90% of total loans at the end of last year. The total delinquency ratio of 1.92% at the end of the fourth quarter was up 13 basis points from the end of the third quarter 2012, but 13 basis points lower than the 2.05% level at December 31, 2011. The fourth quarter provision for loan losses of $2.7 million was consistent with the third quarter and $1.1 million higher than the fourth quarter of last year. The allowance for loan losses to nonperforming loans was 148% at December 31, 2012, compared to 139% at September 30, 2012, and 135% as of December 31, 2011.

Upstate New York Branch Banking Expansion

The Company completed the acquisition and conversion of 16 HSBC branches (July 20, 2012) and three First Niagara branches (September 7, 2012) in its core Upstate New York markets in the third quarter. In total, approximately $160 million of loans and $800 million of deposits were acquired in these transactions.

Increased Cash Dividend/Stock Repurchase Authorization

In September, the Company increased its quarterly cash dividend to shareholders by 3.8%, to $0.27 per share, marking its twentieth (20th) consecutive year of annual increases. The increase earned the Company the distinction of being one of only 14 companies to become a new member of the S&P 1500 Dividend Aristocrats Index in 2012, signifying it has raised its annual regular cash dividend payment for at least 20 consecutive years. Based upon the closing price for a share of Community Bank System, Inc. common stock of $28.49 on January 18, 2013, the $0.27 per share quarterly dividend represents an approximate annual yield of 3.8%.

In December, the Company's Board of Directors also approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2.0 million shares of the Company's common stock during a twelve-month period starting on January 1, 2013. The new repurchase authorization replaced an existing program which expired on December 31, 2012.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Wednesday) January 23, 2013 to discuss fourth quarter and full-year results. The conference call can be accessed at 1-877-551-8082 (1-904-520-5770 if outside United States and Canada). An audio recording will be available one hour after the call until March 31, 2013, and may be accessed at 1-888-284-7564 (1-904-596-3174 if outside the United States and Canada) and entering access code 2972591. Investors may also listen live via the Internet at: [http://www.videonewswire.com/event.asp?id=91497]. The recording will be archived until January 23, 2014 and can be accessed at any point during this time at no cost.

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.

Headquartered in DeWitt, N.Y., Community Bank System, Inc. has $7.5 billion in assets and over 180 customer facilities. The Company's banking subsidiary, Community Bank, N.A. operates across Upstate New York and Northeastern Pennsylvania, where it conducts business as First Liberty Bank & Trust. Its other subsidiaries include: Benefit Plans Administrative Services, Inc., a national employee benefits consulting and trust administration firm with offices in New York, New Jersey, Pennsylvania and Texas; the CBNA Insurance Agency, with offices in five northern New York communities; Community Investment Services, Inc., a wealth management firm delivering a wide range of financial products throughout the Company's branch network; and Nottingham Advisors, an investment management and advisory firm with offices in Buffalo, N.Y. and North Palm Beach, Florida. For more information, visit: www.communitybankna.com or www.firstlibertybank.com.

Summary of Financial Data

(Dollars in thousands, expect per share data)

Quarter Ended

Year Ended

December 31,

December 31,

Earnings

2012

2011

2012

2011

Loan income

$49,405

$50,511

$192,710

$192,981

Investment income

22,545

19,903

88,690

77,988

Total interest income

71,950

70,414

281,400

270,969

Interest expense

11,981

15,279

50,976

61,556

Net interest income

59,969

55,135

230,424

209,413

Provision for loan losses

2,666

1,593

9,108

4,736

Net interest income after provision for loan losses

57,303

53,542

221,316

204,677

Deposit service fees

12,603

11,027

46,064

42,334

Mortgage banking revenues

161

37

843

1,735

Other banking services

613

694

3,226

2,916

Wealth management services

3,449

2,831

12,876

10,697

Benefit trust, administration, consulting and actuarial fees

9,397

7,879

35,946

31,601

Investment securities and debt extinguishment gains/(losses), net

0

(69)

291

(61)

Total noninterest income

26,223

22,399

99,246

89,222

Salaries and employee benefits

29,639

27,093

112,034

102,278

Occupancy and equipment and furniture

6,665

6,089

25,799

24,502

Amortization of intangible assets

1,264

1,130

4,607

4,381

Acquisition expenses & litigation settlement

3,027

142

8,247

4,831

Other

16,304

13,383

61,070

54,380

Total operating expenses

56,899

47,837

211,757

190,372

Income before income taxes

26,627

28,104

108,805

103,527

Income taxes

7,823

9,116

31,737

30,385

Net income

$18,804

$18,988

$77,068

$73,142

Basic earnings per share

$0.47

$0.51

$1.95

$2.03

Diluted earnings per share

$0.47

$0.51

$1.93

$2.01

Summary of Financial Data

(Dollars in thousands, except per share data)

2012

2011

4th Qtr

3rd Qtr

2nd Qtr

1st Qtr

4th Qtr

Earnings

Loan income

$49,405

$48,590

$47,077

$47,638

$50,511

Investment income

22,545

22,804

23,468

19,873

19,903

Total interest income

71,950

71,394

70,545

67,511

70,414

Interest expense

11,981

12,619

12,774

13,602

15,279

Net interest income

59,969

58,775

57,771

53,909

55,135

Provision for loan losses

2,666

2,643

2,155

1,644

1,593

Net interest income after provision for loan losses

57,303

56,132

55,616

52,265

53,542

Deposit service fees

12,603

12,057

11,035

10,369

11,027

Mortgage banking revenues

161

128

234

320

37

Other banking services

613

1,277

662

674

694

Wealth management services

3,449

3,194

3,101

3,132

2,831

Benefit trust, administration, consulting and actuarial fees

9,397

8,912

8,664

8,973

7,879

Investment securities gains/(losses), net

0

291

0

0

(69)

Total noninterest income

26,223

25,859

23,696

23,468

22,399

Salaries and employee benefits

29,639

28,126

26,844

27,425

27,093

Occupancy and equipment and furniture

6,665

6,541

6,130

6,463

6,089

Amortization of intangible assets

1,264

1,212

1,045

1,086

1,130

Acquisition expenses & litigation settlement

3,027

4,796

164

260

142

Other

16,304

15,410

15,187

14,169

13,383

Total operating expenses

56,899

56,085

49,370

49,403

47,837

Income before income taxes

26,627

25,906

29,942

26,330

28,104

Income taxes

7,823

7,539

8,871

7,504

9,116

Net income

$18,804

$18,367

$21,071

$18,826

$18,988

Basic earnings per share

$0.47

$0.46

$0.53

$0.49

$0.51

Diluted earnings per share

$0.47

$0.46

$0.53

$0.48

$0.51

Profitability

Return on assets

1.00%

0.98%

1.20%

1.14%

1.16%

Return on equity

8.20%

8.12%

9.82%

9.22%

9.96%

Return on tangible equity(3)

13.55%

13.27%

16.01%

15.59%

17.91%

Noninterest income/operating income (FTE) (1)

29.0%

28.8%

27.6%

28.8%

27.6%

Efficiency ratio (2)

58.2%

56.5%

56.1%

59.0%

57.2%

Components of Net Interest Margin (FTE)

Loan yield

5.16%

5.25%

5.42%

5.58%

5.80%

Cash equivalents yield

0.26%

0.26%

0.34%

0.26%

0.25%

Investment yield

3.85%

3.82%

3.97%

4.33%

4.49%

Earning asset yield

4.54%

4.54%

4.78%

4.89%

5.11%

Interest-bearing deposit rate

0.34%

0.40%

0.44%

0.56%

0.65%

Borrowing rate

3.89%

3.56%

2.85%

3.79%

4.21%

Cost of all interest-bearing funds