Community Bank System Reports Strong Second Quarter Results

Community Bank System, Inc. (NYSE: CBU) reported second quarter 2012 net income of $21.1 million, or $0.53 per share, an increase of 17.2% over the $18.0 million, or $0.49 per share, reported for the second quarter of 2011. Year-to-date earnings of $39.9 million, or $1.01 per share, increased 16.8% and five cents per share, compared to the first six months of 2011.

Total revenue for the second quarter of 2012 was $81.5 million, an increase of $4.5 million, or 5.9%, over the prior year second quarter. The higher revenue was a result of an 11.4% increase in average earning assets, including growth in both loans and investment securities. The net interest income generated by these increases in earning assets was partially offset by a 17-basis point decline in the Company’s net interest margin to 3.96%. The quarterly provision for loan losses of $2.2 million was $1.1 million higher than the second quarter of 2011 and consistent with the increase in quarterly net charge-offs and generally stable asset quality trends. Total operating expenses were $49.4 million for the quarter, down $1.8 million or 3.4% from the second quarter of 2011, reflecting lower acquisition-related expenses.

“We produced strong operating results for the second quarter, characterized by earning asset growth that drove a six percent increase in top line revenues, disciplined operating expense management and continued stable and favorable asset quality metrics,” said President and Chief Executive Officer Mark E. Tryniski. “We grew loans by $101 million in the quarter, with improvements across all portfolios. We continued to appropriately manage our cost of funds and were able to maintain a stable net interest margin through the first half of this year. On July 23, 2012, we completed the acquisition and conversion of 16 former HSBC branch locations, which will strengthen our competitive presence across our Upstate New York footprint. We are pleased with the successful conversion process, and excited by the opportunity to solidify and expand our relationship with these new customers. We expect to complete the conversion process of the remaining three branches that we are acquiring from First Niagara in early September. We believe that we’re positioned to produce solid core results for the remainder of 2012, and are enthusiastic about the potential to create incremental shareholder value from the recent acquisitions.”

Net interest income in the second quarter of 2012 increased 6.6%, to $57.8 million, from the prior year quarter, the result of a $647.8 million increase in average interest-earning assets, comprised of an additional $590 million of investment securities (including cash equivalents) and a 1.7% increase in average loans. On a linked quarter basis loans grew $100.9 million, or 2.9%, with favorable results experienced in all portfolios (consumer installment products, consumer mortgage, and business lending). The Company’s net interest margin of 3.96% for the quarter was consistent with the first quarter of this year, and 17 basis points lower than the second quarter of 2011. Quarterly net interest income generation reflected the continuation of the pre-investing of a portion of the net liquidity received from the branch acquisition principally in US Treasury and other high-quality government securities. This pre-investing initiative began late in the first quarter of 2012.

Second quarter non-interest income increased $0.9 million to $23.7 million compared with second quarter 2011, reflecting increased benefits administration and consulting fees, higher deposit services fees, increased wealth management revenues offset somewhat by lower mortgage banking revenues. The employee benefits administration and consulting revenues were up 10.3% compared to second quarter 2011, principally from the December 2011 acquisition of Metro New York based, CAI Benefits (CAI). Wealth management fees were up $0.3 million, or 11.5% over second quarter 2011, driven by solid gains in trust services and asset management. Mortgage banking revenues of $0.2 million for the quarter were almost entirely from servicing fees, reflective of the decision to continue to hold a majority of the Company’s mortgage originations in portfolio. Deposit service fees of $11.0 million were up $0.5 million, or 5.2% from second quarter of 2011, and seasonally higher than the first quarter of 2012.

Second quarter core (excluding acquisition expenses) operating expenses of $49.2 million, increased $1.7 million over the second quarter of 2011, and included the recurring operating expenses of CAI. On a linked quarter basis operating expenses were essentially flat, with seasonally lower employee benefits and occupancy expenses offsetting higher business development and marketing costs.

The second quarter 2012 effective income tax rate, of 29.6%, was 2.2% above the effective tax rate for the prior year quarter, the result of a higher proportion of income being generated from fully taxable sources.

Financial Position

Average earning assets for the second quarter were $6.3 billion, an increase of $647.8 million compared to second quarter 2011, and up $421.6 million over the first quarter of 2012. Ending loans increased $100.9 million on a linked basis reflecting strong organic growth primarily from consumer mortgage and installment products. Average investment securities, including cash equivalents increased $589.7 million from second quarter 2011, reflective of the Company’s acquired liquidity pre-investment initiative, which began late in the first quarter. Average deposits increased $231.9 million, or 5.0%, compared to the second quarter of 2011, with core accounts growing by $357 million and time deposits declining $125 million. Quarter-end borrowings were $1.26 billion, and included $430 million of overnight funds which were extinguished upon the completion of the HSBC branch acquisition.

Quarter-end shareholders’ equity of $885.1 million was $155.0 million, or 21.2%, higher than June 30, 2011, and up $44.4 million from the end of the first quarter of 2012. The increase was driven by the January 2012 issuance of 2.1 million additional shares in support of the Company’s acquisition of 19 branch-banking centers in Upstate New York, appreciation in the available-for-sale investment portfolio, and continued solid growth in retained earnings due to record net income generation. The continued strengthening of the Company’s capital position was evidenced by the 165 basis-point increase in the net tangible equity to net tangible assets ratio from the end of the second quarter of 2011 in comparison to June 30, 2012, as well the 39 basis-point increase in the same ratio from March 31, 2012.

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 $2.1 million for the second quarter, compared to $2.0 million for the first quarter of 2012 and $0.7 million for second quarter of 2011. Nonperforming loans as a percentage of total loans at June 30, 2012 were 0.90% (0.79% excluding acquired loans), down from the 0.92% at March 31, 2012, and up from a very modest 0.58% of total loans at June 30, 2011. The total delinquency ratio of 1.71% at the end of the second quarter (1.62% excluding acquired loans) was down seven basis points from first quarter 2012, and up 21 basis points from the 1.50% level at June 30, 2011. The second quarter provision for loan losses of $2.2 million was $0.5 million higher than the first quarter provision and up $1.1 million from the second quarter of 2011. The allowance for loan losses to nonperforming loans was 131% at June 30, 2012, compared to 132% on March 31, 2012 and 144% as of December 31, 2011.

Upstate New York Branch Banking Expansion

The Company announced during the first quarter that it had entered into agreements to acquire 19 branch-banking centers across its core Upstate New York markets from HSBC and First Niagara through its wholly-owned subsidiary, Community Bank, N.A. The Company completed the first stage of the transaction by acquiring and converting the 16 HSBC branches on July 23, 2012. The acquisition and conversion of the three remaining branches, from First Niagara, is expected to be completed in early September 2012.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Wednesday) July 25, 2012 to discuss second quarter 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 September 30, 2012, and may be accessed at 1-888-284-7564 (1-904-596-3174 if outside the United States and Canada) and entering access code 2912801. Investors may also listen live via the Internet at: [ http://www.videonewswire.com/event.asp?id=88075 ] and may 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 $7.2 billion in assets (as of June 30, 2012) 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-to-Date
  June 30, June 30, June 30, June 30,
Earnings 2012 2011 2012 2011
Loan income $ 47,077 $ 49,471 $ 94,715 $ 91,768
Investment income 23,468 20,379 43,341 38,369
Total interest income 70,545 69,850 138,056 130,137
Interest expense 12,774 15,663 26,376 30,427
Net interest income 57,771 54,187 111,680 99,710
Provision for loan losses 2,155 1,050 3,799 2,100
Net interest income after provision for loan losses 55,616 53,137 107,881 97,610
Deposit service fees 11,035 10,488 21,404 20,173
Mortgage banking revenues 234 982 554 1,378
Other banking services 662 645 1,336 1,043
Wealth management services 3,101 2,782 6,233 4,962
Benefit trust, administration, consulting and actuarial fees 8,664 7,854 17,637 16,037
Investment securities and debt extinguishment gains/(losses), net 0 14 0 14
Total noninterest income 23,696 22,765 47,164 43,607
Salaries and employee benefits 26,844 25,531 54,269 48,642
Occupancy and equipment and furniture 6,130 6,253 12,593 12,310
Amortization of intangible assets 1,045 1,189 2,131 2,090
Acquisition expenses 164 3,617 424 4,308
Other 15,187 14,536 29,356 27,092
Total operating expenses 49,370 51,126 98,773 94,442
Income before income taxes 29,942 24,776 56,272 46,775
Income taxes 8,871 6,790 16,375 12,629
Net income $ 21,071 $ 17,986 $ 39,897 $ 34,146
Basic earnings per share $ 0.53 $ 0.49 $ 1.02 $ 0.97
Diluted earnings per share     $ 0.53     $ 0.49     $ 1.01     $ 0.96
                   

Summary of Financial Data

(Dollars in thousands, except per share data)
                         
2012 2011
  2nd Qtr     1st Qtr 4th Qtr     3rd Qtr     2nd Qtr
Earnings                      
Loan income $ 47,077 $ 47,638 $ 50,511 $ 50,702 $ 49,471
Investment income 23,468 19,873 19,903 19,716 20,379
Total interest income 70,545 67,511 70,414 70,418 69,850
Interest expense 12,774 13,602 15,279 15,850 15,663
Net interest income 57,771 53,909 55,135 54,568 54,187
Provision for loan losses 2,155 1,644 1,593 1,043 1,050
Net interest income after provision for loan losses 55,616 52,265 53,542 53,525 53,137
Deposit service fees 11,035 10,369 11,027 11,134 10,488
Mortgage banking revenues 234 320 37 320 982
Other banking services 662 674 694 1,179 645
Wealth management services 3,101 3,132 2,831 2,904 2,782
Benefit trust, administration, consulting and actuarial fees 8,664 8,973 7,879 7,685 7,854
Investment securities and debt extinguishment gains/(losses), net 0 0 (69 ) (6 ) 14
Total noninterest income 23,696 23,468 22,399 23,216 22,765
Salaries and employee benefits 26,844 27,425 27,093 26,543 25,531
Occupancy and equipment and furniture 6,130 6,463 6,089 6,103 6,253
Amortization of intangible assets 1,045 1,086 1,130 1,161 1,189
Acquisition expenses 164 260 142 381 3,617
Other 15,187 14,169 13,383 13,905 14,536
Total operating expenses 49,370 49,403 47,837 48,093 51,126
Income before income taxes 29,942 26,330 28,104 28,648 24,776
Income taxes 8,871 7,504 9,116 8,640 6,790
Net income $ 21,071 $ 18,826 $ 18,988 $ 20,008 $ 17,986
Basic earnings per share $ 0.53 $ 0.49 $ 0.51 $ 0.54 $ 0.49
Diluted earnings per share $ 0.53       $ 0.48   $ 0.51       $ 0.54       $ 0.49  
Profitability                      
Return on assets 1.20 % 1.14 % 1.16 % 1.23 % 1.14 %
Return on equity 9.82 % 9.22 % 9.96 % 10.67 % 10.15 %
Return on tangible equity (3) 16.01 % 15.59 % 17.91 % 19.63 % 17.11 %
Noninterest income/operating income (FTE) (1) 27.6 % 28.8 % 27.6 % 28.5 % 28.1 %
Efficiency ratio (2)   56.1 %       59.0 %   57.2 %       57.0 %       57.2 %
Components of Net Interest Margin (FTE)                      
Loan yield 5.42 % 5.58 % 5.80 % 5.81 % 5.77 %
Cash equivalents yield 0.34 % 0.26 % 0.25 % 0.25 % 0.24 %
Investment yield 3.97 % 4.33 % 4.49 % 4.55 % 4.75 %
Earning asset yield 4.78 % 4.89 % 5.11 % 5.13 % 5.24 %
Interest-bearing deposit rate 0.44 % 0.56 % 0.65 % 0.70 % 0.70 %
Borrowing rate 2.85 % 3.79 % 4.21 % 4.27 % 4.24 %
Cost of all interest-bearing funds 0.99 % 1.13 % 1.27 % 1.32 % 1.34 %
Cost of funds (includes DDA) 0.84 % 0.96 % 1.08 % 1.12 % 1.14 %
Net interest margin (FTE) 3.96 % 3.96 % 4.06 % 4.04 % 4.13 %
Fully tax-equivalent adjustment     $ 4,335       $ 4,031       $ 3,851       $ 3,836       $ 4,018  
                   
Summary of Financial Data
(Dollars in thousands, except per share data)
       
2012 2011
  2nd Qtr     1st Qtr 4th Qtr     3rd Qtr     2nd Qtr
Average Balances                      
Loans $ 3,512,427 $ 3,454,240 $ 3,473,366 $ 3,481,087 $ 3,454,246
Cash equivalents 10,017 251,828 233,984 240,127 177,154
Taxable investment securities 2,091,576 1,565,215 1,495,590 1,458,127 1,447,815
Nontaxable investment securities 692,839 613,947 567,835 560,051 579,795
Total interest-earning assets 6,306,859 5,885,230 5,770,775 5,739,392 5,659,010
Total assets 7,058,473 6,618,812 6,474,722 6,447,210 6,313,391
Interest-bearing deposits 4,003,213 3,964,062 3,929,231 3,926,457 3,864,671
Borrowings 1,182,707 859,774 830,344 832,505 839,003
Total interest-bearing liabilities 5,185,920 4,823,836 4,759,575 4,758,962 4,703,674
Noninterest-bearing deposits 907,153 884,451 878,443 867,373 813,789
Shareholders' equity   862,747         821,043     756,334         743,730         710,765  
Balance Sheet Data                      
Cash and cash equivalents $ 130,902 $ 132,055 $ 324,878 $ 425,877 $ 273,693
Investment securities 2,931,918 2,765,145 2,151,370 2,075,283 2,088,105
Loans:
Business lending 1,216,309 1,210,773 1,226,439 1,261,125 1,290,893
Consumer mortgage 1,289,155 1,245,217 1,214,621 1,167,781 1,149,219
Consumer installment - indirect 591,249 542,605 556,955 564,423 549,449
Home equity 310,555 317,716 323,840 328,468 330,213
Consumer installment - direct 154,403 144,428 149,170 154,672 158,376
Total loans 3,561,671 3,460,739 3,471,025 3,476,469 3,478,150
Allowance for loan losses 41,828 41,809 42,213 42,463 42,531
Intangible assets 358,435 359,480 360,564 360,228 363,015
Other assets 225,233 236,848 222,651 208,460 230,053
Total assets 7,166,331 6,912,458 6,488,275 6,503,854 6,390,485
Deposits:
Noninterest-bearing 944,695 911,131 894,464 887,009 849,071
Non-maturity interest-bearing 2,942,333 2,974,191 2,776,532 2,782,241 2,721,589
Time 1,023,324 1,066,685 1,124,249 1,169,503 1,186,442
Total deposits 4,910,352 4,952,007 4,795,245 4,838,753 4,757,102
Borrowings 1,157,872 910,427 728,281 728,335 728,441
Subordinated debt held by unconsolidated subsidiary trusts 102,060 102,054 102,048 102,042 102,036
Other liabilities 110,988 107,297 88,118 79,091 72,835
Total liabilities 6,281,272 6,071,785 5,713,692 5,748,221 5,660,414
Shareholders' equity 885,059 840,673 774,583 755,633 730,071
Total liabilities and shareholders' equity   7,166,331         6,912,458     6,488,275         6,503,854         6,390,485  
Capital                      
Tier 1 leverage ratio 8.98 % 9.37 % 8.38 % 8.17 % 8.07 %
Tangible equity/net tangible assets (3) 8.09 % 7.70 % 7.12 % 6.79 % 6.44 %
Diluted weighted average common shares O/S 40,057 39,323 37,491 37,312 37,061
Period end common shares outstanding 39,472 39,439 36,986 36,829 36,807
Cash dividends declared per common share $ 0.26 $ 0.26 $ 0.26 $ 0.26 $ 0.24
Book value $ 22.42 $ 21.32 $ 20.94 $ 20.52 $ 19.84
Tangible book value (3) $ 14.00 $ 12.84 $ 11.85 $ 11.37 $ 10.59
Common stock price (end of period)     $ 27.12       $ 28.78       $ 27.80       $ 22.69       $ 24.79  
                 
Summary of Financial Data
(Dollars in thousands, except per share data)
       
2012 2011
  2nd Qtr     1st Qtr 4th Qtr     3rd Qtr     2nd Qtr
Asset Quality                      
Nonaccrual loans $ 28,570 $ 30,147 $26,262     $ 16,502 $ 17,833
Accruing loans 90+ days delinquent 3,437 3,889 3,089 2,319 2,499
Total nonperforming loans 32,007 34,036 29,351 18,821 20,332
Other real estate owned (OREO) 2,899 2,690 2,682 2,776 3,269
Total nonperforming assets 34,906 36,726 32,033 21,597 23,601
Net charge-offs 2,135 2,048 1,844 1,111 666
Allowance for loan losses/loans outstanding 1.17 % 1.21 % 1.22 % 1.22 % 1.22 %
Nonperforming loans/loans outstanding 0.90 % 0.92 % 0.85 % 0.54 % 0.58 %
Allowance for loan losses/nonperforming loans 131 % 132 % 144 % 226 % 209 %
Net charge-offs/average loans 0.24 % 0.24 % 0.21 % 0.13 % 0.08 %
Delinquent loans/ending loans 1.71 % 1.78 % 1.99 % 1.56 % 1.50 %
Loan loss provision/net charge-offs 101 % 80 % 94 % 94 % 158 %
Nonperforming assets/total assets   0.49 %       0.50 % 0.49 %       0.33 %       0.37 %
Asset Quality (excluding loans acquired since 1/1/09)                      
Nonaccrual loans $ 22,395 $ 20,178 $17,585 $ 13,540 $ 13,208
Accruing loans 90+ days delinquent 3,070 2,700 2,878 2,233 2,466
Total nonperforming loans 25,465 22,878 20,463 15,773 15,674
Other real estate owned (OREO) 1,577 1,778 1,734 1,810 1,889
Total nonperforming assets 27,042 24,656 22,196 17,583 17,563
Net charge-offs 1,217 752 1,844 1,111 666
Allowance for loan losses/loans outstanding 1.28 % 1.30 % 1.36 % 1.38 % 1.40 %
Nonperforming loans/loans outstanding 0.79 % 0.74 % 0.69 % 0.52 % 0.52 %
Allowance for loan losses/nonperforming loans 161 % 175 % 197 % 268 % 271 %
Net charge-offs/average loans 0.16 % 0.10 % 0.24 % 0.14 % 0.09 %
Delinquent loans/ending loans 1.62 % 1.61 % 1.77 % 1.57 % 1.45 %
Loan loss provision/net charge-offs 180 % 37 % 79 % 72 % 158 %
Nonperforming assets/total assets       0.40 %       0.38 %     0.36 %       0.29 %       0.30 %
 
(1) Excludes gain (loss) on investment securities.
(2) Excludes intangible amortization, goodwill impairment, acquisition expenses, and gain (loss) on investment securities.
(3) Includes deferred tax liabilities (of approximately $26.0 million at 6/30/12) 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.

Copyright Business Wire 2010

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