Community Bank System Reports Record Second Quarter 2015 Results

- GAAP earnings of $0.58 per share

- Quarterly loan growth of $100 million

SYRACUSE, N.Y.--()--Community Bank System, Inc. (NYSE:CBU) reported second quarter 2015 net income of $23.8 million, an increase of 0.7% compared with $23.7 million earned for the second quarter of 2014. Diluted earnings per share totaled $0.58 for the second quarter of 2015, a one cent per share improvement over the $0.57 per share reported in the second quarter of 2014, and included $0.4 million of acquisition expenses, or six-tenths of a cent per share. 2015 year-to-date net income of $46.1 million, or $1.12 per share, was 0.9% above the first six months of 2014, and included $0.8 million of acquisition expenses, or 1.3 cents per share.

“Our record second quarter operating results were driven by solid loan growth, particularly business lending, a continuation of exceptional credit quality, and disciplined expense management,” said President and Chief Executive Officer Mark E. Tryniski. “After a very slow start to our lending activity in the first quarter of 2015, we were able to realize a strong improvement in our second quarter momentum. In addition, in the first quarter we announced the signing of a definitive agreement to acquire Oneida Financial Corp., which will further extend and strengthen our Central New York service area by expanding our market presence in the Syracuse and Utica-Rome metropolitan areas. This transaction adds to our product and service offerings in insurance, benefits and wealth management, while combining two organizations with similar cultures and the same history of impeccable service to our customers and investment in our communities. Subject to various regulatory approvals, we expect to complete the transaction early in the fourth quarter. ”

Total revenue for the second quarter of 2015 was $90.9 million, an increase of $0.1 million, or 0.1%, over the prior year quarter. The modestly higher revenue was generated as a result of a 3.5% increase in average earning assets and continued growth in core noninterest income, which more than offset an 18 basis-point reduction in net interest margin from the prior year quarter. Continued organic growth drove a $0.8 million, or 5.5% increase in wealth management and employee benefit services revenues. Deposit service fees increased slightly year-over-year, the result of increased card-related revenues offset by lower fees from account overdraft protection programs. The quarterly provision for loan losses of $0.6 million was $1.3 million lower than the second quarter of 2014, reflective of lower levels of net charge-offs and improved non-performing asset and delinquent loan ratios. Total operating expenses of $56.0 million for the quarter were $0.9 million, or 1.6% above the second quarter of 2014, and included acquisition expenses of $0.4 million. Certain statutory changes to state tax rates and structures along with a lower proportion of tax-exempt income resulted in a quarterly effective tax rate of 30.5% in the second quarter of 2015, compared to 29.9% in the second quarter of 2014.

Second quarter 2015 net interest income was $61.2 million, an increase of $0.1 million, or 0.1%, compared to the second quarter of 2014. Improved funding costs were offset by a 20-basis point decline in earning asset yields, which were driven by lower blended interest rates on loans and investment securities. While average loan balances grew $90.0 million, or 2.2%, average loan yields declined 11 basis points year-over-year, resulting in a $0.3 million reduction in quarterly loan interest income. Investment interest income was $0.1 million higher than the second quarter of 2014 as average investment securities (including cash equivalents) increased by $141.5 million, and the yield declined 33 basis points, principally the result of the decision to early invest a portion of the expected net liquidity from the pending Oneida Financial transaction. Interest expense was $0.3 million lower than the previous year’s quarter, driven by a three basis-point decline in the total cost of funds. Wealth management and employee benefit services revenues increased $0.8 million, or 5.5%, to $15.7 million compared to second quarter 2014. Customer and product expansion continued into 2015 and drove the improved performance. Revenues from mortgage banking and other services declined $0.8 million from the second quarter of 2014, which included nearly $0.5 million in non-recurring insurance-related gains.

Second quarter 2015 operating expenses of $56.0 million increased $0.9 million over the second quarter of 2014, including $0.4 million of acquisition expenses incurred in the second quarter of 2015. Salaries and employee benefits increased $0.6 million, or 2.0%, and included planned merit increases. All other expenses, excluding acquisition expenses, declined 0.3% and reflected lower occupancy and equipment costs and lower intangible amortization compared to the second quarter of 2014, partially offset by slightly higher business development costs. The second quarter 2015 effective income tax rate of 30.5% was higher than the 29.9% in last year’s second quarter.

Financial Position

Average earning assets of $6.86 billion for the second quarter of 2015 were up $231.5 million from the second quarter of 2014, and were $196.6 million higher than the first quarter of 2015. Compared to the prior year, total average earning asset balances included growth of $90.0 million in average loan balances, while average investment securities and interest-earning cash balances increased by $141.5 million, predominantly from incremental investment purchases related to the anticipated net liquidity from the pending Oneida Financial acquisition. Average deposit balances grew $119.8 million compared to the second quarter of 2014, and were $75.4 million higher than the first quarter of 2015. Average borrowings in the second quarter of 2015 of $438.9 million were $53.8 million, or 14.0%, higher than the prior year quarter.

Ending loans at June 30, 2015 increased $115.8 million, or 2.8%, year-over-year, reflecting productive organic growth in almost every one of the Company’s lending portfolios, and was generally consistent with market demand characteristics. Investment securities totaled $2.87 billion at June 30, 2015, up $333.6 million from the end of June 2014.

Shareholders’ equity of $1.0 billion at June 30, 2015 was $45.3 million, or 4.7%, higher than the prior year quarter-end, primarily due to strong earnings generation and capital retention over the last four quarters. The Company’s net tangible equity to net tangible assets ratio was 8.63% at June 30, 2015, up from 8.44% at June 30, 2014. The Company’s Tier 1 leverage ratio rose to 10.20% for the current quarter, up 56 basis points from the second quarter of 2014.

As previously announced, in December 2014 the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.0 million shares of the Company’s common stock during a twelve-month period starting January 1, 2015. Such repurchases may be made at the discretion of the Company’s 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 repurchased 265,230 shares of its common stock in the first quarter of 2015. No additional shares were repurchased in the second quarter.

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 $0.3 million for the second quarter, compared to $1.5 million for the second quarter of 2014 and $1.0 million for the first quarter of 2015. Net charge-offs as an annualized percentage of average loans measured 0.03% in the second quarter of 2015, compared to 0.14% in the prior year second quarter and 0.09% in the first quarter of 2015. Nonperforming loans as a percentage of total loans at June 30, 2015 were 0.54%, slightly improved from 0.58% at June 30, 2014 and consistent with the 0.54% of total loans at March 31, 2015. The total loan delinquency ratio of 1.09% at the end of the second quarter was down 15 basis points from the end of the second quarter of 2014. The second quarter provision for loan losses of $0.6 million was $1.3 million, or 68.9%, lower than the second quarter of 2014, and consistent with the first quarter of 2015, due primarily to lower net charge-off levels than the previous year’s second quarter. The allowance for loan losses to nonperforming loans was 197% at June 30, 2015, comparable with the 187% and 198% levels at the end of the second quarter of 2014 and the first quarter of 2015, respectively.

Oneida Financial Corp

In February 2015, the Company announced the signing of a definitive agreement to acquire Oneida Financial Corp., the parent company of Oneida Savings Bank for approximately $142 million in Community Bank System, Inc. stock and cash, or $20.00 per share. Under the terms of the agreement, shareholders of Oneida Financial Corp. can elect to receive either 0.5635 shares of Community Bank System, Inc. common stock or $20.00 in cash for each share of Oneida Financial Corp. common stock they hold, subject to an overall 60% stock and 40% cash split. The merger agreement has been unanimously approved by the board of directors of both companies. Community Bank System, Inc. expects the transaction to be immediately accretive excluding merger-related costs. The merger, which has been approved by the Oneida shareholders, is expected to close in October 2015, subject to required regulatory approvals.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) today (Monday, July 20th) to discuss second quarter results. The conference call can be accessed at 888-427-9376 (1-719-457-2645 if outside United States and Canada) using the conference ID code 7762121. Investors may also listen live via the Internet at: http://www.webcaster4.com/Webcast/Page/995/9437.

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 $7.9 billion, the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail and business banking services, the Company offers comprehensive financial planning, insurance and wealth management services. 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 or http://ir.communitybanksystem.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)        
Quarter Ended Year-to-Date
        June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014
Earnings              
Loan income $45,791 $46,073 $91,382 $91,766
Investment income 18,089 18,036 34,952 35,582
Total interest income 63,880 64,109 126,334 127,348
Interest expense 2,652 2,939 5,266 6,069
Net interest income 61,228 61,170 121,068 121,279
Provision for loan losses 591 1,900 1,214 2,900
Net interest income after provision for loan losses 60,637 59,270 119,854 118,379
Deposit service fees 13,213 13,172 25,683 25,427
Revenues from mortgage banking and other banking services 799 1,608 1,854 2,798
Wealth management services 4,385 4,438 8,831 8,912
Employee benefit services 11,322 10,448 22,397 20,883
Total noninterest income 29,719 29,666 58,765 58,020
Salaries and employee benefits 31,010 30,409 62,039 61,149
Occupancy and equipment 6,844 6,916 14,239 14,608
Amortization of intangible assets 880 1,101 1,799 2,242
Litigation settlement 0 0 0 0
Acquisition expenses 361 0 756 123
Other 16,953 16,738 33,163 32,964
Total operating expenses 56,048 55,164 111,996 111,086
Income before income taxes 34,308 33,772 66,623 65,313
Income taxes 10,468 10,096 20,486 19,463
Net income $23,840 $23,676 $46,137 $45,850
Basic earnings per share $0.58 $0.58 $1.13 $1.13
Diluted earnings per share       $0.58 $0.57 $1.12 $1.11
 
     

Summary of Financial Data

(Dollars in thousands, except per share data)          
2015 2014
        2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
Earnings                
Loan income $45,791 $45,591 $46,878 $46,883 $46,073
Investment income 18,089 16,863 17,707 17,404 18,036
Total interest income 63,880 62,454 64,585 64,287 64,109
Interest expense 2,652 2,614 2,829 2,893 2,939
Net interest income 61,228 59,840 61,756 61,394 61,170
Provision for loan losses 591 623 2,531 1,747 1,900
Net interest income after provision for loan losses 60,637 59,217 59,225 59,647 59,270
Deposit service fees 13,213 12,470 13,496 13,833 13,172
Revenues from mortgage banking and other banking services 799 1,055 1,149 1,867 1,608
Wealth management services 4,385 4,446 4,341 4,617 4,438
Employee benefit services 11,322 11,075 10,942 10,755 10,448
Total noninterest income 29,719 29,046 29,928 31,072 29,666
Salaries and employee benefits 31,010 31,029 30,987 30,941 30,409
Occupancy and equipment 6,844 7,395 6,724 6,617 6,916
Amortization of intangible assets 880 919 994 1,051 1,101
Litigation settlement 0 0 0 2,800 0
Acquisition expenses 361 395 0 0 0
Other 16,953 16,210 17,979 17,402 16,738
Total operating expenses 56,048 55,948 56,684 58,811 55,164
Income before income taxes 34,308 32,315 32,469 31,908 33,772
Income taxes 10,468 10,018 9,336 9,537 10,096
Net income $23,840 22,297 23,133 22,371 23,676
Basic earnings per share $0.58 $0.55 $0.57 $0.55 $0.58
Diluted earnings per share       $0.58 $0.54 $0.56 $0.54 $0.57
Profitability                
Return on assets 1.25% 1.21% 1.22% 1.19% 1.28%
Return on equity 9.44% 8.97% 9.35% 9.25% 10.13%
Return on tangible equity(3) 14.40% 13.74% 14.57% 14.66% 16.34%
Noninterest income/operating income (FTE) (1) 31.6% 31.6% 31.3% 32.2% 31.3%
Efficiency ratio (2)       58.3% 59.4% 58.3% 57.0% 57.0%
Components of Net Interest Margin (FTE)                
Loan yield 4.40% 4.45% 4.43% 4.48% 4.51%
Cash equivalents yield 0.28% 0.20% 0.19% 0.17% 0.23%
Investment yield 3.15% 3.22% 3.43% 3.37% 3.48%
Earning asset yield 3.92% 3.99% 4.06% 4.06% 4.12%
Interest-bearing deposit rate 0.15% 0.16% 0.16% 0.17% 0.17%
Borrowing rate 0.84% 1.01% 0.88% 0.87% 0.91%
Cost of all interest-bearing funds 0.20% 0.21% 0.22% 0.23% 0.23%
Cost of funds (includes DDA) 0.16% 0.17% 0.18% 0.18% 0.19%
Net interest margin (FTE) 3.76% 3.83% 3.89% 3.89% 3.94%
Fully tax-equivalent adjustment       $3,115 $3,085 $3,804 $3,923 $3,972
 
     
Summary of Financial Data
(Dollars in thousands, except per share data)          
2015 2014
        2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
Average Balances                
Loans $4,211,961 $4,190,823 $4,223,653 $4,180,283 $4,121,976
Cash equivalents 11,325 18,080 11,260 8,225 9,535
Taxable investment securities 2,031,234 1,845,295 1,830,375 1,834,590 1,839,488
Nontaxable investment securities 607,585 611,330 622,365 642,114 659,662
Total interest-earning assets 6,862,105 6,665,528 6,687,653 6,665,212 6,630,661
Total assets 7,678,719 7,489,179 7,495,814 7,457,409 7,407,151
Interest-bearing deposits 4,777,195 4,704,003 4,689,788 4,671,216 4,754,636
Borrowings 438,931 327,791 406,610 427,051 385,150
Total interest-bearing liabilities 5,216,126 5,031,794 5,096,398 5,098,267 5,139,786
Noninterest-bearing deposits 1,321,738 1,319,499 1,293,760 1,281,626 1,224,515
Shareholders' equity       1,012,470 1,008,394 981,737 959,484 937,532
Balance Sheet Data                
Cash and cash equivalents $143,047 $150,533 $138,396 $157,500 $161,903
Investment securities 2,868,050 2,656,424 2,512,974 2,506,242 2,534,419
Loans:
Business lending 1,295,889 1,239,529 1,262,484 1,251,178 1,247,129
Consumer mortgage 1,608,064 1,605,019 1,613,384 1,598,298 1,580,584
Consumer indirect 837,449 804,300 833,968 841,975 797,297
Home equity 340,578 338,979 342,342 339,121 339,345
Consumer direct 181,623 176,084 184,028 186,672 183,448
Total loans 4,263,603 4,163,911 4,236,206 4,217,244 4,147,803
Allowance for loan losses 45,282 45,005 45,341 45,273 44,615
Intangible assets, net 385,515 386,054 386,973 387,966 389,018
Other assets 293,838 264,122 260,232 278,964 272,815
Total assets 7,908,771 7,576,039 7,489,440 7,502,643 7,461,343
Deposits:
Noninterest-bearing 1,337,101 1,316,621 1,324,661 1,279,052 1,257,223
Non-maturity interest-bearing 4,020,192 4,055,976 3,837,603 3,881,249 3,872,262
Time 729,527 753,950 773,000 807,030 841,810
Total deposits 6,086,820 6,126,547 5,935,264 5,967,331 5,971,295
Borrowings 566,200 195,700 338,000 343,805 319,408
Subordinated debt held by unconsolidated subsidiary trusts 102,134 102,128 102,122 102,115 102,109
Accrued interest and other liabilities 153,278 138,262 126,150 123,868 113,516
Total liabilities 6,908,432 6,562,637 6,501,536 6,537,119 6,506,328
Shareholders' equity 1,000,339 1,013,402 987,904 965,524 955,015
Total liabilities and shareholders' equity       7,908,771 7,576,039 7,489,440 7,502,643 7,461,343
Capital                
Tier 1 leverage ratio 10.20% 10.23% 9.96% 9.79% 9.64%
Tangible equity/net tangible assets (3) 8.63% 9.19% 8.92% 8.57% 8.44%
Diluted weighted average common shares O/S 41,265 41,247 41,248 41,260 41,269
Period end common shares outstanding 40,877 40,724 40,748 40,707 40,688
Cash dividends declared per common share $0.30 $0.30 $0.30 $0.30 $0.28
Book value $24.47 $24.88 $24.24 $23.72 $23.47
Tangible book value(3) $15.96 $16.31 $15.63 $15.04 $14.74
Common stock price (end of period) $37.77 $35.39 $38.13 $33.59 $36.20
 
     
Summary of Financial Data
(Dollars in thousands, except per share data)          
2015 2014
        2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
Asset Quality                
Nonaccrual loans $21,439 $20,984 $20,731 $21,323 $21,991
Accruing loans 90+ days delinquent 1,557 1,699 3,106 2,690 1,930
Total nonperforming loans 22,996 22,683 23,837 24,013 23,921
Other real estate owned (OREO) 2,324 1,767 1,855 3,619 4,281
Total nonperforming assets 25,320 24,450 25,692 27,632 28,202
Net charge-offs 313 959 2,462 1,090 1,482
Allowance for loan losses/loans outstanding 1.062% 1.081% 1.070% 1.074% 1.076%
Nonperforming loans/loans outstanding 0.54% 0.54% 0.56% 0.57% 0.58%
Allowance for loan losses/nonperforming loans 197% 198% 190% 189% 187%
Net charge-offs/average loans 0.03% 0.09% 0.23% 0.10% 0.14%
Delinquent loans/ending loans 1.09% 1.19% 1.46% 1.32% 1.24%
Loan loss provision/net charge-offs 188% 65% 103% 160% 128%
Nonperforming assets/total assets       0.32% 0.32% 0.34% 0.37% 0.38%
Asset Quality (excluding loans acquired since 1/1/09)                
Nonaccrual loans $18,557 $18,278 $17,676 $17,313 $18,147
Accruing loans 90+ days delinquent 1,463 1,325 2,828 2,545 1,813
Total nonperforming loans 20,020 19,603 20,504 19,858 19,960
Other real estate owned (OREO) 1,518 1,357 1,469 1,794 2,303
Total nonperforming assets 21,538 20,960 21,973 21,652 22,263
Net charge-offs 425 877 2,098 1,088 1,204
Allowance for loan losses/loans outstanding 1.11% 1.14% 1.14% 1.14% 1.15%
Nonperforming loans/loans outstanding 0.50% 0.50% 0.52% 0.51% 0.52%
Allowance for loan losses/nonperforming loans 223% 226% 221% 226% 221%
Net charge-offs/average loans 0.04% 0.09% 0.21% 0.11% 0.13%
Delinquent loans/ending loans 1.04% 1.11% 1.39% 1.23% 1.19%
Loan loss provision/net charge-offs 191% 61% 125% 160% 155%
Nonperforming assets/total assets       0.28% 0.29% 0.30% 0.30% 0.31%
 
(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 $37.7 million at 6/30/15) 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.

Contacts

Community Bank System, Inc.
Scott A. Kingsley, 315-445-3121 (Office)
EVP & Chief Financial Officer

Release Summary

Community Bank System, Inc. reports record Second Quarter 2015 results.

Contacts

Community Bank System, Inc.
Scott A. Kingsley, 315-445-3121 (Office)
EVP & Chief Financial Officer