Community Bank System Reports

  First Quarter 2017 Results

 

	-  First Quarter GAAP EPS of $0.57 per share
	-  Completed the acquisition of Northeast Retirement Services

                                       

During the first quarter of 2017 the company adopted new accounting guidance for share-based transactions.  That guidance requires that all excess tax benefits and tax deficiencies associated with share-based compensation be recognized as income tax expense or benefit in the income statement.  Previously, tax effects resulting from changes in the company's share price subsequent to the grant date of equity instruments were recorded through shareholders' equity at the time of vesting or exercise.  The adoption of the amended accounting guidance resulted in a $2.2 million reduction of income tax expense in the first quarter of 2017, or $0.04 of diluted earnings per common share, net.

"We continued our trend of solid quarterly operating results despite achieving only modest seasonal growth in our overall earning asset base. Our results included a continuation of excellent credit quality, disciplined expense management and continued improvement in our non-interest income generation," said President and Chief Executive Officer Mark E. Tryniski.  "In February, we successfully completed the acquisition of Northeast Retirement Services, Inc. ("NRS"), a leading provider of benefit plan accounting, transfer agency, fund administration, trust and retirement plan services."  Mr. Tryniski continued, "We also anticipate receiving final regulatory approvals for our previously announced plan to merge with Merchants Bancshares, Inc. ("Merchants"), a high-quality $2.0 billion-asset company providing banking and other financial services across the State of Vermont and in Western Massachusetts.  We anticipate completing the transaction in mid-May."

Total revenue for the first quarter of 2017 was $111.6 million, an increase of $6.4 million, or 6.1%, over the prior year quarter, and included approximately $5.0 million of revenues from the NRS transaction completed in early February.  Higher revenue was generated as a result of a 1.5% increase in average earning assets and continued growth in noninterest income, partially offset by a two basis-point decline in net interest margin from the prior year quarter.  A combination of acquired and organic growth resulted in a $5.5 million, or 23.9% increase in wealth management, insurance, and employee benefit services revenues.  Deposit service fees increased 7.1% year-over-year, primarily the result of increased card-related revenues.  Other banking services declined $0.4 million from the first quarter of 2016, entirely related to an insurance-related gain experienced last year.  The quarterly provision for loan losses of $1.8 million was $0.5 million higher than the first quarter of 2016, reflective of higher quarterly net charge-off levels.  Non-performing asset and delinquent loan ratios were generally stable compared to the most recent four quarter-ends.  Excluding acquisition expenses from both periods, total operating expenses of $71.9 million for the quarter were $4.3 million, or 6.3% above the first quarter of 2016, and included a partial quarter of operating expenses from NRS, as well as an additional $1.5 million of intangible amortization from that transaction.

 

First quarter 2017 net interest income was $67.3 million, an increase of $0.4 million, or 0.6%, compared to the first quarter of 2016.  Slightly lower funding costs and a two basis-point decline in the earning asset yield resulted in a two basis point decrease in net interest margin year-over-year.  Average loan balances grew $126.5 million, or 2.6%, but were partially offset by average loan yields declining two basis points year-over-year, resulting in a $0.7 million increase in quarterly loan interest income.  Investment interest income was $0.5 million lower than the first quarter of 2016 as average investment securities (including cash equivalents) balances decreased by $14.7 million, and the yield on investments declined six basis points.  Interest expense was $0.2 million lower than the previous year's quarter, driven by a one-basis point decline in cost of funds, and a $119.4 million decline in average borrowings, partially offset by a $177.7 million increase in average deposit balances.  Wealth management and insurance services revenues increased $0.3 million, or 2.8%, compared to the first quarter of 2016, to $11.3 million.  Employee benefit services revenues increased $5.2 million from the first quarter of 2016, almost entirely related to the NRS acquisition.

Excluding acquisition expenses, first quarter 2017 operating expenses of $71.9 million, which included the partial quarter of operating activities of NRS, increased $4.3 million over the first quarter of 2016.  Salaries and employee benefits increased $2.3 million, or 5.8%, and included the personnel added from the NRS transaction as well as planned merit increases.  All other expenses increased 7.0%, and reflected the occupancy, equipment and other operating costs of NRS, including significantly higher intangible amortization, compared to the first quarter of 2016.  The first quarter 2017 effective income tax was 27.4%, and reflected the previously mentioned $2.2 million reduction in income tax expense related to the change in accounting for share-based transactions.  Excluding that change, the core effective income tax rate would have been approximately 33.5%, compared to 32.5% in the first quarter of 2016, reflective of a higher proportion of income being generated from fully taxable sources.

The Company also provides supplemental reporting of its results on a "net adjusted" or "tangible" basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and expenses associated with acquisitions.  The amounts of such expenses are presented in the tables that accompany this release.  Although "adjusted net income" as defined by the Company is not a GAAP measure, the Company's management believes this information helps investors understand the effect of acquisition activity in reported results.  Diluted adjusted net earnings per share were $0.64 in the first quarter of 2017.

Financial Position

Average earning assets of $7.72 billion for the first quarter of 2017 were up $111.8 million from the first quarter of 2016, and were consistent with the fourth quarter of 2016.  Compared to the prior year, total average earning asset balances included organic loan growth of $126.5 million, while average investment securities and interest-earning cash balances declined by $14.7 million.   Average deposit balances grew $177.7 million compared to the first quarter of 2016, and were $87.4 million higher than the fourth quarter of 2016.  Average borrowings in the first quarter of 2017 of $177.6 million, were $36.3 million, or 17.0%, lower than the fourth quarter of last year.

Ending loans at March 31, 2017 increased $111.0 million, or 2.3%, year-over-year, reflecting productive organic growth in the Company's consumer lending portfolios.  Investment securities totaled $2.79 billion at March 31, 2017, down somewhat from three of the previous four quarter-ends, and reflective of limited reinvestment of securities cash flows over the last twelve months.

Shareholders' equity of $1.30 billion at March 31, 2017 was $95.4 million, or 7.9%, higher than the prior year period, a result of strong earnings generation and capital retention over the last four quarters, as well as incremental shares issued in conjunction with the NRS acquisition in February.  The Company's net tangible equity to net tangible assets ratio was 8.91% at March 31, 2017.  The Company's Tier 1 leverage ratio was 10.35% at the end of the first quarter, compared to 9.95% a year earlier.

 

As previously announced, in December 2016 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, 2017.  Such repurchases may be made at the discretion of the Company's senior management based 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.  There were no shares repurchased in the first quarter of 2017.

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 $2.0 million for the first quarter, compared to $2.2 million for the fourth quarter of 2016 and $1.1 million for the first quarter of 2016.  Net charge-offs as an annualized percentage of average loans measured 0.16% in the first quarter of 2017, compared to 0.18% in last year's fourth quarter and 0.10% in the first quarter of 2016.  Nonperforming loans as a percentage of total loans at March 31, 2017 were 0.46%, improved from 0.48% at December 31, 2016 and 0.54% at March 31, 2016.  The total loan delinquency ratio of 0.94% at the end of the first quarter was 25 basis points lower than the level at December 31, 2016, and six basis points lower than last year's first quarter-end.  The first quarter provision for loan losses of $1.8 million was $0.8 million lower than the fourth quarter of 2016, and $0.5 million higher than the first quarter of 2016.  The allowance for loan losses to nonperforming loans was 206% at March 31, 2017, compared with the 199% and 175% levels at the end of the fourth quarter and first quarter of 2016, respectively.

Dividend Increase

In August 2016, 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 2.4% based upon its' closing price of $54.44 on April 21, 2017.

Merchants Bancshares, Inc.

On October 24, 2016, the Company announced that it had entered into a definitive agreement to acquire Merchants Bancshares, Inc. ("Merchants"), parent company of Merchants Bank headquartered in South Burlington, Vermont, for approximately $335 million in Company stock and cash.  The acquisition will extend the Company's footprint into the Vermont and Western Massachusetts markets.  Upon the completion of the merger, Community Bank will add 31 branch locations in Vermont and one location in Western Massachusetts with approximately $2.0 billion of assets, and deposits of $1.5 billion.  The Company and Merchants have received regulatory approval from the Office of the Comptroller of the Currency for the proposed merger and anticipate closing the merger in mid-May, subject to the receipt of approval from the Board of Governors of the Federal Reserve System and satisfaction of customary closing conditions.

Northeast Retirement Services, Inc. 

On December 5, 2016, the Company announced that it had entered into a definitive agreement to acquire Northeast Retirement Services, Inc. ("NRS"), a leading provider of plan accounting, transfer agency, fund administration, trust and retirement plan services for approximately $148.6 million in Company stock and cash.  The acquisition was completed on February 3, 2017.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow, April 25, 2017, to discuss first quarter results.  The conference call can be accessed at 877-852-6576 (1-719-325-4896 if outside United States and Canada) using the conference ID code 4779182.  Investors may also listen live via the Internet at: http://www.webcaster4.com/Webcast/Page/995/20523.

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 $8.9 billion, the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail, 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 (which includes the recently acquired NRS)  is a leading provider of employee benefits administration, trust services, fund administration 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.

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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; changes in legislation or regulatory requirements; and the timing for receiving regulatory approvals and completing pending transactions.  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.

 

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