Community Bank System Reports Strong Second Quarter Results

Community Bank System ReportsStrong Second Quarter Results

- Quarterly earnings per share of $0.52

- Loan growth of $74 million in the quarter (8% annualized)


- Additional balance sheet restructuring completed during the quarter

SYRACUSE, N.Y.--(BUSINESS WIRE)-- Community Bank System, Inc. (NYS: CBU) reported net income of $21.1 million for second quarter 2013, compared with $21.1 million earned for the second quarter of 2012. Diluted earnings per share were $0.52 for the second quarter of 2013, versus $0.53 in the second quarter of last year. Year-to-date earnings increased 3.7% over the first six months of 2012, to $41.4 million ($1.02 per share).

Total revenue for the second quarter of 2013 was $85.5 million, an increase of $4.1 million, or 5.0%, compared to second quarter 2012. Higher revenue was driven by higher non-interest income from an increased deposit account base, along with continued solid organic growth in wealth management and benefits administration services. Net interest income was up 1.1% from the second quarter 2012 reflective of productive acquired and organic loan growth over the past twelve months, as well as the balance sheet restructuring activities completed in the first and second quarters of 2013. The quarterly provision for loan losses of $1.3 million was $0.8 million lower than the second quarter of 2012, reflective of lower net charge-offs and the continuation of generally stable and favorable asset quality metrics. Total operating expenses of $54.4 million for the quarter were $5.0 million, or 10.1%, higher than the second quarter of 2012, primarily driven by additional operating costs associated with the branch acquisitions completed in third quarter 2012.

"The positive operating momentum from the first quarter continued through the midpoint of 2013, with solid organic loan growth, a strong increase in fee income, responsible expense management, and very positive asset quality metrics," said President and Chief Executive Officer Mark E. Tryniski. "Our results through June 30, 2013, reflect our balanced approach to growth, both acquired and organic. Non-interest income growth remained robust in the second quarter with double-digit year-over-year increases in our deposit service fees, wealth management services and our benefit plan services. With solid growth in our loan portfolio, appropriate management of our funding costs, a strong capital position and exceptional asset quality metrics, we believe that we're well positioned for the remainder of 2013 and beyond."

Second quarter net interest income of $58.4 million increased 1.1% compared with the prior year period, despite a planned reduction of interest-earning assets and interest-bearing liabilities, the net result of solid loan growth and the balance sheet restructuring activities. Second quarter interest income was down $6.4 million compared to the prior year quarter as a result of a $50.7 million net decrease in interest-earning assets along with a 43-basis point decline in the earning asset yield, driven by lower yields on both loans (down 63 basis points) and investment securities (down 14 basis points). This was more than offset by a $7.1 million decrease in interest expense reflecting a $246.1 million reduction in interest-bearing liabilities coupled with a 46-basis point decline in the Bank's cost of funds. The lower cost of funds was driven by continued low market interest rates that enabled the Company to lower deposit rates to produce a 20-basis point decline in the interest-bearing deposit rate in comparison to second quarter 2012, and the extinguishment of certain higher cost borrowings. During the first and second quarters of 2013, the Company initiated and completed a balance sheet restructuring program that involved selling nearly $650 million of longer duration investment securities and using the proceeds to retire $502 million of Federal Home Loan Bank (FHLB) borrowings.

Second quarter non-interest income of $27.1 million increased $3.4 million, or 14.4% compared to last year's second quarter. Deposit service revenues grew $1.3 million, or 11.9%, to $12.3 million, as a result of a 15.5% increase in deposit account balances, reflective of both the branch acquisitions and organic growth across the franchise. Wealth management revenues were up $0.9 million, or 30.4%, over second quarter 2012, driven by solid gains in trust services, asset management and advisory services, and favorable market conditions. Employee benefits administration and consulting revenues grew 8.5% to $9.4 million benefitting from new and expanded customer relationships. Noninterest income for the six months ended June 30, 2013 was $53.2 million (31% of total revenue) an increase of $6.0 million, or 12.8%, compared to the first six months of 2012.

Quarterly operating expenses of $54.4 million increased $5.0 million, or 10.1%, over the second quarter of 2012, principally reflecting the recurring operating expenses of the branches acquired in the third quarter of 2012. Salaries and employee benefits increased $3.4 million, or 12.8%, and occupancy costs grew 10.1% primarily as a result of the branch acquisitions. Other expenses increased by $0.9 million, or 5.8%, also a reflection of the additional costs of operating an expanded franchise, including customer service and account processing. Year-to-date operating expenses were $108.9 million, an increase of $10.2 million, or 10.3%, over the prior year period.

The second quarter and first half of 2013's effective income tax rate of 29.2% was consistent with the 29.1% rate reported in the first six months of 2012, reflective of generally stable proportions of income being generated from fully taxable and non-taxable sources.

Balance Sheet Restructuring Completed

In April 2013, the Company sold an additional $250.1 million of investment securities related to its balance sheet restructuring program initiated in the first quarter of 2013, and extinguished an additional $135.0 million of FHLB borrowings. The Company realized $16.0 million of gains, and incurred $15.7 million of early extinguishment costs in the second quarter. During the first quarter of 2013 the Company sold $398.7 million of investment securities, realizing $47.8 million of gains, and utilized the proceeds to retire FHLB borrowings of $366.6 million with $47.8 million of early extinguishment costs. As a result of this initiative the size the Company's balance sheet was reduced by approximately 7% during the first half of the year. Although these transactions were essentially neutral to both year-to-date earnings and total capital, they effectively created over $35 million of incremental regulatory (Tier 1) capital, and are expected to be modestly additive to future net interest income generation.

Financial Position

Average earning assets for the second quarter of 2013 were $6.3 billion, a decrease of $412.0 million, or 6.2%, compared to the fourth quarter of 2012, and reflective of the balance sheet restructuring activities described above. Compared to the prior year period, second quarter average earning assets were down $50.7 million. Ending investment securities, including cash equivalents, totaled $2.37 billion at June 30, 2013, $573.1 million lower than the prior year quarter end due to the balance sheet restructuring initiatives described above. Ending loans increased $374.3 million year-over-year, or 10.5%, reflecting both loans from the acquired branches and strong organic growth in the consumer lending portfolios. Total deposits at second quarter end increased by $759.8 million, or 15.5%, from June 30, 2012, primarily a result of the branch acquisitions in third quarter of last year. Total deposits have increased by $42.1 million, an annualized increase of 1.5%, compared to the 2012 year end. The Company's Tier 1 leverage ratio improved to 9.43% for the current quarter, up 65 basis points from March 31, 2013 and 103 basis points higher than the fourth quarter of 2012. Tangible equity to net tangible assets declined 15 basis points from the end of the first quarter, to 7.43%, reflective of changes in the net unrealized gains on available for sale securities.

Asset Quality

The Company's asset quality metrics for the second quarter of 2013 remained substantially 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 $0.8 million for the second quarter, compared to $2.1 million for the second quarter of 2012 and $1.4 million for the first quarter of 2013. Nonperforming loans as a percentage of total loans were 0.62% at June 30, 2013, down from 0.71% at March 31, 2013, and down from 0.90% of total loans at June 30, 2012. The total delinquency ratio of 1.50% at the end of the second quarter was down 21 basis points from second quarter 2012 and five basis points lower than the end of the first quarter 2013. The second quarter provision for loan losses of $1.3 million was down $0.8 million, or 39%, compared to second quarter 2012, consistent with the lower level of net charge-offs and nonperforming loans in the current quarter. The allowance for loan losses to nonperforming loans was 178% at June 30, 2013, compared to 131% at June 30, 2012 and 157% as of March 31, 2013.

Stock Repurchase Authorization

The Company's Board of Directors approved a stock repurchase program, in December 2012, authorizing the repurchase of up to 2.0 million shares of the Company's common stock at the discretion of executive management. The authorization period started on January 1, 2013 and ends on December 31, 2013. The Company did not repurchase any stock in the first half of 2013.

Rebranding Pennsylvania Banking Operations

The Company announced in early June that it will rebrand its First Liberty Bank and Trust operations in Northeastern Pennsylvania to Community Bank, N.A. The Company entered the Pennsylvania market with the acquisition of First Liberty in 2001 and decided to maintain the brand to preserve the goodwill associated with the name.

"We believe that the rebranding of our Pennsylvania operations will enable our customers in these markets to have a clearer understanding of our service footprint and the range of our product and service offerings," Mr. Tryniski said. "We also view this as an opportunity to streamline our marketing effort with a single brand, which is expected to provide enhanced efficiency." The changeover is targeted to be completed by early September 2013.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Wednesday) July 24, 2013 to discuss second quarter results. The conference call can be accessed at 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 September 30, 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 2985411. Investors may also listen live via the Internet at: http://www.videonewswire.com/event.asp?id=94759. The recording will be archived until July 24, 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 more than $7.0 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 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.

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.

Summary of Financial Data

(Dollars in thousands, expect per share data)

Quarter Ended

Year-to-Date

June 30,

June 30,

June 30,

June 30,

2013

2012

2013

2012

Earnings

Loan income

$46,412

$47,077

$93,530

$94,715

Investment income

17,728

23,468

38,535

43,341

Total interest income

64,140

70,545

132,065

138,056

Interest expense

5,708

12,774

15,208

26,376

Net interest income

58,432

57,771

116,857

111,680

Provision for loan losses

1,321

2,155

2,714

3,799

Net interest income after provision for loan losses

57,111

55,616

114,143

107,881

Deposit service fees

12,345

11,035

23,940

21,404

Mortgage banking revenues

342

234

513

554

Other banking services

678

662

1,545

1,336

Wealth management services

4,045

3,101

7,743

6,233

Benefit trust, administration, consulting and actuarial fees

9,397

8,664

19,167

17,637

Gain on sales of investment securities

16,008

0

63,799

0

Loss on debt extinguishments

(15,717)

0

(63,500)

0

Total noninterest income

27,098

23,696

53,207

47,164

Salaries and employee benefits

30,286

26,844

60,769

54,269

Occupancy and equipment and furniture

6,750

6,130

13,815

12,593

Amortization of intangible assets

1,140

1,045

2,319

2,131

Acquisition expenses

0

164

0

424

Other

16,200

15,187

32,025

29,356

Total operating expenses

54,376

49,370

108,928

98,773

Income before income taxes

29,833

29,942

58,422

56,272

Income taxes

8,711

8,871

17,059

16,375

Net income

21,122

21,071

$41,363

$39,897

Basic earnings per share

$0.53

$0.53

$1.03

$1.02

Diluted earnings per share

$0.52

$0.53

$1.02

$1.01

Summary of Financial Data

(Dollars in thousands, except per share data)

2013

2012

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

Earnings

Loan income

$46,412

$47,118

$49,405

$48,590

$47,077

Investment income

17,728

20,807

22,545

22,804

23,468

Total interest income

64,140

67,925

71,950

71,394

70,545

Interest expense

5,708

9,500

11,981

12,619

12,774

Net interest income

58,432

58,425

59,969

58,775

57,771

Provision for loan losses

1,321

1,393

2,666

2,643

2,155

Net interest income after provision for loan losses

57,111

57,032

57,303

56,132

55,616

Deposit service fees

12,345

11,595

12,603

12,057

11,035

Mortgage banking revenues

342

171

161

128

234

Other banking services

678

867

613

1,277

662

Wealth management services

4,045

3,698

3,449

3,194

3,101

Benefit trust, administration, consulting and actuarial fees

9,397

9,770

9,397

8,912

8,664

Gain on sales of investment securities

16,008

47,791

0

291

0

Loss on debt extinguishments

(15,717)

(47,783)

0

0

0

Total noninterest income

27,098

26,109

26,223

25,859

23,696

Salaries and employee benefits

30,286

30,483

29,639

28,126

26,844

Occupancy and equipment

6,750

7,065

6,665

6,541

6,130

Amortization of intangible assets

1,140

1,179

1,264

1,212

1,045

Acquisition expenses & litigation settlement

0

0

3,027

4,796

164

Other

16,200

15,825

16,304

15,410

15,187

Total operating expenses

54,376

54,552

56,899

56,085

49,370

Income before income taxes

29,833

28,589

26,627

25,906

29,942

Income taxes

8,711

8,348

7,823

7,539

8,871

Net income

21,122

20,241

18,804

18,367

21,071

Basic earnings per share

$0.53

$0.51

$0.47

$0.46

$0.53

Diluted earnings per share

$0.52

$0.50

$0.47

$0.46

$0.53

Profitability

Return on assets

1.21%

1.11%

1.00%

0.98%

1.20%

Return on equity

9.70%

9.18%

8.20%

8.12%

9.82%

Return on tangible equity(3)

16.38%

15.32%

13.55%

13.27%

16.01%

Noninterest income/operating income (FTE) (1)

30.2%

29.5%

29.0%

28.8%

27.6%

Efficiency ratio (2)

59.9%

60.3%

58.2%

56.5%

56.1%

Components of Net Interest Margin (FTE)