News Release For further information, please contact:
5790 Widewaters Parkway, DeWitt, N.Y. 13214	Scott A. Kingsley, EVP & Chief Financial Officer Office: (315) 445-3121

 

Community Bank System Reports

  Third Quarter 2016 Results

 

	-  GAAP earnings of $27.2 million, or $0.61 per share
	-  Increased dividend for the 24th consecutive year

"Our solid third quarter operating results were a result of consistent tactical execution on our core strategic objectives, including growing revenues from organic and acquired opportunities while maintaining disciplined operating expense management," said President and Chief Executive Officer, Mark E. Tryniski.  "As we celebrate our 150^th year anniversary in 2016, the strength of our company continues to be driven by the commitment of our employees.  Through their hard work and dedication, we continue to consistently deliver above-peer financial results.  We remain well positioned to provide the right products and services to our customers so that they may achieve their financial objectives as we continue to create value for our shareholders."

Total revenue for the third quarter of 2016 was $108.4 million, an increase of $14.7 million, or 15.6%, over the prior year quarter, and included the impact of the Oneida Financial transaction completed in December of last year.  The higher revenue was generated as a result of a 7.9% increase in average earning assets and continued acquired and organic growth in noninterest income, combined with a two basis-point increase in net interest margin from the prior year quarter.  A combination of acquired and organic growth resulted in a $6.3 million, or 39.8% increase in wealth management, insurance, and employee benefit services revenues compared to the third quarter of last year.  Deposit service fees increased 10.7% year-over-year, the result of increased card-related revenues offset by modestly lower fees from account overdraft protection programs, including the additional activities from the Oneida transaction.  The current quarter's results also included $1.0 million of nonrecurring insurance-related gains.  The quarterly provision for loan losses of $1.8 million was consistent with the $1.9 million reported in the third quarter of 2015, reflective of comparable credit trends and loan portfolio growth.  Non-performing asset and delinquent loan ratios improved somewhat from the prior year, and remain at very favorable and manageable levels.  Total operating expenses of $66.2 million for the quarter were $10.1 million, or 18.1% above the third quarter of 2015, and included the incremental operating expenses from the Oneida Financial acquisition.  The third quarter of 2015 also included $0.6 million of acquisition expenses.  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 32.8% in the third quarter of 2016, compared to 30.0% in the third quarter of 2015, an outcome that resulted in a two cent per share headwind compared to the prior year.

Third quarter 2016 net interest income was $68.5 million, an increase of $6.1 million, or 9.8%, compared to the third quarter of 2015.  Modestly improved funding costs combined with a one basis point improvement in earning asset yields to produce the net two basis-point increase in year-over-year net interest margin.  While average loan balances grew $626.5 million, or 14.6%, average loan yields declined four basis points year-over-year, resulting in a $6.7 million increase in quarterly loan interest income.  Quarterly loan income also included $0.5 million of early termination fees on an unusually high level of unscheduled commercial payoffs, of over $32 million in the quarter.  Investment interest income was $0.6 million lower than the third quarter of 2015 as average investment securities (including cash equivalents) declined by $66.4 million, and the yield declined seven basis points.  Third quarter 2016 interest expense was $0.1 million lower than the previous year's quarter, driven by an $872.6 million increase in average deposits and a $348.4 million decline in average borrowings, including the impact of the Oneida acquisition.  Wealth management, insurance and employee benefit services revenues increased $6.3 million, or 39.8%, compared to the third quarter of 2015, to $22.2 million, principally from the acquired activities of Oneida Financial.  Revenues from mortgage banking and other banking services increased $0.8 million from the third quarter of 2015, and included nearly $1.0 million in non-recurring, insurance-related gains.

 

Third quarter 2016 operating expenses of $66.2 million increased $10.1 million over the third quarter of 2015, including the operating activities added from the Oneida Financial transaction.  Salaries and employee benefits increased $7.1 million, or 22.8%, and included personnel added from the Oneida transaction as well as planned merit increases.  All other expenses increased 12.2% and reflected the occupancy, equipment and other operating costs of Oneida, including higher intangible amortization, compared to the third quarter of 2015.  The third quarter and year-to-date 2016 effective income tax rates of 32.8% and 32.7%, respectively, were higher than the 30.0% and 30.5%, in last year's comparable periods.  Third quarter 2016 operating expenses were consistent with the second quarter of this year despite an additional day of payroll.

Financial Position

Average earning assets of $7.68 billion for the third quarter of 2016 were up $560.1 million from the third quarter of 2015, and were $29.6 million higher than the second quarter of 2016.  Compared to the prior year, total average earning asset balances included acquired and organic growth of $626.5 million in average loan balances, while average investment securities and interest-earning cash balances decreased by $66.4 million.   Average deposit balances grew $872.6 million compared to the third quarter of 2015, and were $74.5 million lower than the second quarter of 2016, as seasonally expected.  Average borrowings in the third quarter of 2016 of $327.6 million, were $78.3 million higher than the second quarter of this year.

Ending loans at September 30, 2016 increased $627.1 million, or 14.5%, year-over-year, reflecting productive organic growth in almost every one of the Company's lending portfolios, and loans acquired in the Oneida Financial transaction.  Ending loans increased $35.8 million in the third quarter of 2016, as solid growth in consumer lending portfolios more than offset a $29.7 million decline in commercial balances, a result of the previously mentioned unscheduled payoffs.  Investment securities totaled $2.88 billion at September 30, 2016, a level consistent with the previous four quarter-ends.

Shareholders' equity of $1.24 billion at September 30, 2016 was $195.6 million, or 18.7%, higher than the prior year third quarter-end, driven by strong earnings generation and capital retention over the last four quarters as well as the issuance of 2.38 million shares of common stock, or $102.2 million, reflecting the equity portion of the consideration in the Oneida transaction.  The Company's net tangible equity to net tangible assets ratio was 9.66% at September 30, 2016, up from 9.14% at September 30, 2015.  The Company's Tier 1 leverage ratio was 10.35% at the end of the third quarter.

As previously announced, in December 2015 the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.2 million shares of the Company's common stock during a twelve-month period starting January 1, 2016.  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.  No shares were repurchased under this authorization in the first nine months of 2016.

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 credit risk management and underwriting standards.  Net charge-offs were $1.5 million for the third quarter, compared to $1.6 million for the third quarter of 2015 and $1.4 million for the second quarter of 2016.  Net charge-offs as an annualized percentage of average loans were 0.12% in the third quarter of 2016, compared to 0.15% in the prior year third quarter and 0.11% in the second quarter of 2016.  Nonperforming loans as a percentage of total loans at September 30, 2016 were 0.47%, improved from 0.58% at September 30, 2015 and 0.49% as of June 30, 2016.  The total loan delinquency ratio of 1.06% at the end of the third quarter was down 13 basis points from the end of the third quarter of 2015, and down four basis points from June 30, 2016.  The third quarter provision for loan losses of $1.8 million was $0.1 million lower than the third quarter of 2015, and $0.5 million lower than the second quarter of 2016.  The allowance for loan losses to nonperforming loans was 201% at September 30, 2016, compared with the 181% and 193% levels at the end of the third quarter of 2015 and the second quarter of 2016, respectively.

 

Dividend Increase

In August, the Company declared a quarterly cash dividend of $0.32 per share on its common stock, marking the 24^th consecutive year of dividend increases.  President and Chief Executive Officer, Mark E. Tryniski, commented, "The payment of a meaningful and growing dividend is an important component of our commitment to provide consistent and favorable long-term returns to our shareholders.  The increase reflected the continued strength of both our current operating performance and capital position."  The one cent increase, or 3.2%,  in the Company's quarterly cash dividend over the same quarter of the prior year, represents an annualized yield of 2.7% based upon its' closing price of $47.50 on October 21, 2016.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Tuesday, October 25, 2016) to discuss third quarter results.  The conference call can be accessed at 888-503-8171 (1-719-325-2133 if outside the United States and Canada) using the conference ID code 5675553.  Investors may also listen live via the Internet at: http://www.webcaster4.com/Webcast/Page/995/17761.

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 200 customer facilities across Upstate New York and Northeastern Pennsylvania through its banking subsidiary, Community Bank, N.A. With assets of approximately $8.7 billion, the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail, business, and governmental banking services, the Company offers comprehensive financial planning, insurance and wealth management services through its' Community Bank Wealth Management Group and OneGroup NY, Inc. operating subsidiaries.  The Company's Benefit Plans Administrative Services, Inc. subsidiary is a leading provider of employee benefits administration, trust services, and actuarial 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
	September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015
Earnings
Loan income		$	53,706			$	47,040			$	157,865			$	138,422
Investment income			17,616				18,244				54,323				53,196
Total interest income			71,322				65,284				212,188				191,618
Interest expense			2,859				2,921				8,538				8,187
Net interest income			68,463				62,363				203,650				183,431
Provision for loan losses			1,790				1,906				5,436				3,120
Net interest income after provision for loan losses			66,673				60,457				198,214				180,311
Deposit service fees			14,894				13,459				43,636				39,142
Revenues from mortgage banking and other banking services			2,863				2,045				6,039				3,899
Wealth management and insurance services			10,928				4,552				32,381				13,383
Employee benefit services			11,267				11,330				34,949				33,727
Total noninterest income			39,952				31,386				117,005				90,151
Salaries and employee benefits			38,300				31,179				115,388				93,218
Occupancy and equipment			7,373				6,652				22,445				20,891
Amortization of intangible assets			1,359				843				4,204				2,642
Acquisition expenses			2				562				342				1,318
Other			19,192				16,843				57,872				50,006
Total operating expenses			66,226				56,079				200,251				168,075
Income before income taxes			40,399				35,764				114,968				102,387
Income taxes			13,239				10,742				37,548				31,228
Net income		$	27,160			$	25,022			$	77,420			$	71,159
Basic earnings per share		$	0.61			$	0.61			$	1.75			$	1.74
Diluted earnings per share		$	0.61			$	0.60			$	1.74			$	1.72

 

Summary of Financial Data
(Dollars in thousands, except per share data)
		2016												2015
		3rd Qtr				2nd Qtr				1st Qtr				4th Qtr				3rd Qtr
Earnings
Loan income		$	53,706			$	52,509			$	51,650			$	49,321			$	47,040
Investment income			17,616				18,601				18,106				18,683				18,244
Total interest income			71,322				71,110				69,756				68,004				65,284
Interest expense			2,859				2,804				2,875				3,015				2,921
Net interest income			68,463				68,306				66,881				64,989				62,363
Provision for loan losses			1,790				2,305				1,341				3,327				1,906
Net interest income after provision for loan losses			66,673				66,001				65,540				61,662				60,457
Deposit service fees			14,894				15,008				13,734				13,605				13,459
Revenues from mortgage banking and other banking services			2,863				1,597				1,579				1,061				2,045
Wealth management and insurance services			10,928				10,496				10,957				6,825				4,552
Employee benefit services			11,267				11,671				12,011				11,661				11,330
Loss on sale of investments			0				0				0				(4	)			0
Total noninterest income			39,952				38,772				38,281				33,148				31,386
Salaries and employee benefits			38,300				37,950				39,138				33,138				31,179
Occupancy and equipment			7,373				7,409				7,663				6,702				6,652
Amortization of intangible assets			1,359				1,403				1,442				1,021				843
Acquisition expenses			2				263				77				5,719				562
Other			19,192				19,331				19,349				18,400				16,843
Total operating expenses			66,226				66,356				67,669				64,980				56,079
Income before income taxes			40,399				38,417				36,152				29,830				35,764
Income taxes			13,239				12,560				11,749				9,759				10,742
Net income			27,160				25,857				24,403				20,071				25,022
Basic earnings per share		$	0.61			$	0.58			$	0.55			$	0.48			$	0.61
Diluted earnings per share		$	0.61			$	0.58			$	0.55			$	0.47			$	0.60
Profitability
Return on assets			1.24	%			1.20	%			1.14	%			0.98	%			1.25	%
Return on equity			8.71	%			8.62	%			8.34	%			7.41	%			9.77	%
Return on tangible equity(3)			13.52	%			13.63	%			13.38	%			10.98	%			14.82	%
Noninterest income/operating income (FTE) (1)			36.0	%			35.3	%			35.5	%			32.8	%			32.4	%
Efficiency ratio (2)			58.5	%			59.0	%			61.4	%			57.6	%			56.4	%
Components of Net Interest Margin (FTE)
Loan yield			4.36	%			4.35	%			4.33	%			4.43	%			4.40	%
Cash equivalents yield			0.46	%			0.46	%			0.47	%			0.25	%			0.22	%
Investment yield			2.88	%			3.06	%			2.97	%			2.98	%			2.94	%
Earning asset yield			3.82	%			3.87	%			3.82	%			3.86	%			3.81	%
Interest-bearing deposit rate			0.13	%			0.14	%			0.14	%			0.14	%			0.14	%
Borrowing rate			1.31	%			1.50	%			1.33	%			0.83	%			0.72	%
Cost of all interest-bearing funds			0.20	%			0.20	%			0.20	%			0.22	%			0.21	%
Cost of funds (includes DDA)			0.16	%			0.15	%			0.16	%			0.17	%			0.17	%
Net interest margin (FTE)			3.67	%			3.73	%			3.67	%			3.70	%			3.65	%
Fully tax-equivalent adjustment		$	2,450			$	2,605			$	2,524			$	3,041			$	3,162

Summary of Financial Data
(Dollars in thousands, except per share data)
		2016												2015
		3rd Qtr				2nd Qtr				1st Qtr				4th Qtr				3rd Qtr
Average Balances
Loans		$	4,913,517			$	4,866,574			$	4,812,575			$	4,459,575			$	4,287,062
Cash equivalents			19,110				19,456				22,355				12,448				12,395
Taxable investment securities			2,179,044				2,178,448				2,172,983				2,214,690				2,187,818
Nontaxable investment securities			571,327				588,897				603,297				614,891				635,627
Total interest-earning assets			7,682,998				7,653,375				7,611,210				7,301,604				7,122,902
Total assets			8,712,758				8,656,653				8,604,264				8,161,843				7,919,966
Interest-bearing deposits			5,405,180				5,517,287				5,458,273				4,943,210				4,739,513
Borrowings			327,578				249,263				296,964				607,771				675,958
Total interest-bearing liabilities			5,732,758				5,766,550				5,755,237				5,550,981				5,415,471
Noninterest-bearing deposits			1,569,960				1,532,322				1,527,585				1,405,416				1,363,022
Shareholders' equity			1,239,927				1,206,353				1,177,246				1,074,243				1,016,448
Balance Sheet Data
Cash and cash equivalents		$	161,542			$	161,634			$	138,513			$	153,210			$	156,836
Investment securities			2,877,644				2,931,301				2,902,878				2,847,940				2,917,263
Loans:
Consumer mortgage			1,798,748				1,779,295				1,777,792				1,769,754				1,621,862
Business lending			1,506,878				1,536,546				1,509,421				1,497,271				1,288,772
Consumer indirect			1,037,077				993,132				941,151				935,760				872,988
Home equity			401,784				399,870				403,273				403,514				345,446
Consumer direct			196,134				195,959				189,535				195,076				184,479
Total loans			4,940,621				4,904,802				4,821,172				4,801,375				4,313,547
Allowance for loan losses			46,789				46,526				45,596				45,401				45,588
Intangible assets, net			482,119				483,478				484,881				484,146				384,525
Other assets			312,609				307,422				314,053				311,399				270,583
Total assets			8,727,746				8,742,111				8,615,901				8,552,669				7,997,166
Deposits:
Noninterest-bearing			1,577,194				1,546,253				1,533,085				1,499,616				1,357,554
Non-maturity interest-bearing			4,771,436				4,664,635				4,808,650				4,569,310				4,081,796
Time			728,789				746,966				777,327				804,548				708,760
Total deposits			7,077,419				6,957,854				7,119,062				6,873,474				6,148,110
Borrowings			133,900				267,600				33,700				301,300				558,100
Subordinated debt held by unconsolidated subsidiary trusts			102,164				102,158				102,152				102,146				102,140
Accrued interest and other liabilities			173,681				177,570				160,322				135,102				143,790
Total liabilities			7,487,164				7,505,182				7,415,236				7,412,022				6,952,140
Shareholders' equity			1,240,582				1,236,929				1,200,665				1,140,647				1,045,026
Total liabilities and shareholders' equity			8,727,746				8,742,111				8,615,901				8,552,669				7,997,166
Capital
Tier 1 leverage ratio			10.35	%			10.14	%			9.95	%			10.32	%			10.09	%
Tangible equity/net tangible assets (3)			9.66	%			9.58	%			9.25	%			8.59	%			9.14	%
Diluted weighted average common shares O/S			44,835				44,636				44,356				42,373				41,470
Period end common shares outstanding			44,357				44,179				44,070				43,775				41,019
Cash dividends declared per common share		$	0.32			$	0.31			$	0.31			$	0.31			$	0.31
Book value		$	27.97			$	28.00			$	27.24			$	26.06			$	25.48
Tangible book value(3)		$	18.06			$	17.99			$	17.16			$	15.90			$	17.05
Common stock price (end of period)		$	48.11			$	41.09			$	38.21			$	39.94			$	37.17

Summary of Financial Data
(Dollars in thousands, except per share data)
		2016												2015
		3rd Qtr				2nd Qtr				1st Qtr				4th Qtr				3rd Qtr
Asset Quality
Nonaccrual loans		$	21,301			$	22,150			$	23,765			$	21,728			$	23,133
Accruing loans 90+ days delinquent			2,015				1,909				2,327				2,195				2,075
Total nonperforming loans			23,316				24,059				26,092				23,923				25,208
Other real estate owned (OREO)			2,060				1,726				2,031				2,088				2,531
Total nonperforming assets			25,376				25,785				28,123				26,011				27,739
Net charge-offs			1,527				1,375				1,146				3,514				1,600
Allowance for loan losses/loans outstanding			0.95	%			0.95	%			0.95	%			0.95	%			1.06	%
Nonperforming loans/loans outstanding			0.47	%			0.49	%			0.54	%			0.50	%			0.58	%
Allowance for loan losses/nonperforming loans			201	%			193	%			175	%			190	%			181	%
Net charge-offs/average loans			0.12	%			0.11	%			0.10	%			0.31	%			0.15	%
Delinquent loans/ending loans			1.06	%			1.10	%			1.00	%			1.16	%			1.19	%
Loan loss provision/net charge-offs			117	%			168	%			117	%			95	%			119	%
Nonperforming assets/total assets			0.29	%			0.29	%			0.33	%			0.30	%			0.35	%
Asset Quality (excluding loans acquired since 1/1/09)
Nonaccrual loans		$	16,967			$	18,259			$	20,045			$	18,804			$	20,504
Accruing loans 90+ days delinquent			1,870				1,573				1,837				1,802				1,876
Total nonperforming loans			18,837				19,832				21,882				20,606				22,380
Other real estate owned (OREO)			1,594				1,258				1,497				1,546				1,720
Total nonperforming assets			20,431				21,090				23,379				22,152				24,100
Net charge-offs			1,432				1,404				898				3,420				1,473
Allowance for loan losses/loans outstanding			1.02	%			1.02	%			1.04	%			1.05	%			1.10	%
Nonperforming loans/loans outstanding			0.43	%			0.46	%			0.52	%			0.49	%			0.55	%
Allowance for loan losses/nonperforming loans			238	%			224	%			200	%			212	%			201	%
Net charge-offs/average loans			0.13	%			0.13	%			0.09	%			0.34	%			0.14	%
Delinquent loans/ending loans			1.01	%			1.08	%			1.00	%			1.19	%			1.14	%
Loan loss provision/net charge-offs			124	%			144	%			112	%			62	%			127	%
Nonperforming assets/total assets			0.25	%			0.26	%			0.29	%			0.28	%			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 $42.5 million at 9/30/16) 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.