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