Community Bank System Reports Record First Quarter Results

  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. -- April 22, 2014

Community Bank System, Inc. (NYSE: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
millionwas$0.4 millionlower 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 millionfor 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 onApril 10, 2014to
shareholders of record as ofMarch 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   59,108    57,451     58,508    57,111     57,032
provision for loan losses
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           4,474     3,984      3,823     4,045      3,698
services
Employee benefit services   10,435    10,032     9,397     9,397      9,770
Gain on sales of            0         16,969     0         16,008     47,791
investment securities
Loss on debt                0         (23,836)   0         (15,717)   (47,783)
extinguishments
Total noninterest income    28,354    21,379     27,594    27,098     26,109
Salaries and employee       30,740    30,412     30,448    30,286     30,483
benefits
Occupancy and equipment     7,691     6,782      6,448     6,750      7,065
Amortization of             1,141     1,061      1,089     1,140      1,179
intangible assets
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        31,541    21,547     31,058    29,833     28,589
taxes
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       $0.54    $0.38     $0.54    $0.52     $0.50
share
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          16.37%    11.78%     17.57%    16.38%     15.32%
equity^(3)
Noninterest
income/operating income     30.7%     30.5%      30.0%     30.2%      29.5%
(FTE) ^ (1)
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    0.19%     0.21%      0.22%     0.24%      0.28%
rate
Borrowing rate              0.90%     1.86%      2.02%     3.36%      3.76%
Cost of all                 0.25%     0.41%      0.43%     0.46%      0.73%
interest-bearing funds
Cost of funds (includes     0.20%     0.33%      0.35%     0.38%      0.61%
DDA)
Net interest margin (FTE)   3.94%     3.88%      3.94%     3.98%      3.86%
Fully tax-equivalent       $3,834   $3,666    $3,728   $3,644    $4,022
adjustment

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      1,833,296    1,861,206    1,833,355    1,565,756    1,965,073
securities
Nontaxable
investment              638,975      639,199      644,728      642,424      655,694
securities
Total
interest-earning        6,581,881    6,580,694    6,472,482    6,256,112    6,565,301
assets
Total assets            7,333,082    7,278,167    7,154,796    7,003,823    7,368,906
Interest-bearing        4,736,746    4,546,591    4,511,199    4,581,206    4,581,130
deposits
Borrowings              402,548      634,472      589,065      358,627      686,483
Total
interest-bearing        5,139,294    5,181,063    5,100,264    4,939,833    5,267,613
liabilities
Noninterest-bearing     1,197,922    1,149,873    1,138,039    1,095,774    1,095,256
deposits
Shareholders'         906,787     872,567     850,238     873,108     893,746
equity
Balance Sheet Data                                                
Cash and cash           $153,417     $149,647     $174,205     $148,573     $330,298
equivalents
Investment              2,506,221    2,218,725    2,518,574    2,366,512    2,448,120
securities
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      44,197       44,319       44,083       43,473       42,913
losses
Intangible assets,      390,119      390,499      383,735      384,815      385,954
net
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            3,928,230    3,766,145    3,630,684    3,608,829    3,678,905
interest-bearing
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                 102,103      102,097      102,091      102,085      102,079
unconsolidated
subsidiary trusts
Accrued interest
and other               120,991      79,998       79,798       76,151       105,454
liabilities
Total liabilities       6,479,092    6,220,052    6,436,338    6,170,685    6,343,779
Shareholders'           918,136      875,812      865,679      850,031      877,294
equity
Total liabilities
and shareholders'     7,397,228   7,095,864   7,302,017   7,020,716   7,221,073
equity
Capital                                                           
Tier 1 leverage         9.48%        9.29%        9.39%        9.43%        8.78%
ratio
Tangible equity/net
tangible assets         7.97%        7.68%        7.38%        7.43%        7.58%
^(3)
Diluted weighted
average common          41,152       41,061       40,850       40,558       40,321
shares O/S
Period end common       40,658       40,431       40,296       40,099       39,989
shares outstanding
Cash dividends
declared per common     $0.28        $0.28        $0.28        $0.27        $0.27
share
Book value              $22.58       $21.66       $21.48       $21.20       $21.94
Tangible book           $13.79       $12.80       $12.73       $12.35       $13.01
value^(3)
Common stock price    $39.02      $39.68      $34.12      $30.85      $29.63
(end of period)

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          1,977     2,555    2,650    1,439    2,560
delinquent
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  1.08%     1.08%    1.10%    1.10%    1.11%
outstanding
Nonperforming loans/loans        0.58%     0.54%    0.61%    0.62%    0.71%
outstanding
Allowance for loan               187%      201%     181%     178%     157%
losses/nonperforming loans
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          89%       108%     147%     173%     102%
charge-offs
Nonperforming assets/total       0.39%     0.38%    0.41%    0.42%    0.47%
assets
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          1,826     2,418    2,471    1,349    2,164
delinquent
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  1.15%     1.15%    1.16%    1.19%    1.21%
outstanding
Nonperforming loans/loans        0.52%     0.49%    0.54%    0.55%    0.64%
outstanding
Allowance for loan               222%      234%     215%     215%     190%
losses/nonperforming loans
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          121%      130%     126%     210%     113%
charge-offs
Nonperforming assets/total       0.31%     0.32%    0.33%    0.34%    0.38%
assets
                                                                      
^(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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