OREANDA-NEWS. Community Bank System, Inc. (NYSE:CBU) reported first quarter 2016 net income of $24.4 million, a 9.4% increase over the $22.3 million of net income generated in the first quarter of 2015. Diluted earnings per share totaled $0.55 for the first quarter of 2016, one cent per share higher than the $0.54 per share reported in the first quarter of 2015. The Company incurred $0.1 million and $0.4 million of acquisition expenses in the first quarter of 2016 and 2015, respectively.

“Our improved first quarter operating results were driven by solid earning-asset growth, a continuation of excellent credit quality, and a full quarter impact of the Oneida Financial transaction completed in late 2015,” said President and Chief Executive Officer Mark E. Tryniski. “A productive start in both our lending and core funding activities in the first quarter of 2016 positions us well for the balance of the year. We completed the acquisition of Oneida Financial Corp. in early December 2015, which further extended and strengthened our Central New York service coverage by expanding our market presence in the Syracuse and Utica-Rome metropolitan areas. This transaction also added to our product and service offerings in insurance, benefits administration and wealth management. We are pleased with the first full quarter’s results for the acquired businesses, which were in line with our original expectations.”

Total revenue for the first quarter of 2016 was $105.2 million, an increase of $16.3 million, or 18.3%, over the prior year quarter, and included a full quarter of activities from the Oneida Financial Corp. (“Oneida”) acquisition that closed on December 4, 2015. The increased revenue was generated as a result of a 14.2% increase in average earning assets and growth in noninterest income from acquired and organic sources, which more than offset a 16 basis-point reduction in net interest margin from the prior year quarter. First quarter net interest income was $66.9 million, an increase of $7.0 million, or 11.8%, compared to the first quarter of 2015. Modestly lower funding costs were offset by a 17-basis point decline in earning asset yields, the result of lower interest rates on investment securities and loans, including the acquired Oneida portfolios. Average loan balances grew $621.8 million, or 14.8%, while average loan yields declined 12 basis points year-over-year to 4.33%, resulting in a $6.1 million increase in quarterly loan interest income. Investment income was $1.2 million higher than the first quarter of 2015, as average investment securities (including cash equivalents) increased by $323.9 million, more than offsetting the yield decline of 25 basis points. Wealth management and insurance revenues increased $6.5 million, or 146.5%, compared to the first quarter of 2015, principally due to the Oneida acquisition. First quarter revenues from employee benefit services increased $0.9 million, or 8.5% year-over-year, with approximately one-third of that growth coming from acquired Oneida activities. Revenues from mortgage banking and other sources were $0.5 million above the first quarter of 2015 and included $0.4 million of non-recurring insurance-related gains. Quarterly deposit service fees increased 10.1% year-over-year, principally from the Oneida acquisition, as higher card-related revenues more than offset the continuing trend of declining fees from account overdraft protection and similar services.

First quarter 2016 operating expenses of $67.7 million increased $11.7 million, or 20.9% versus the first quarter of 2015, and reflected a full quarter of core operating expenses from the Oneida transaction. Salaries and employee benefit costs increased $8.1 million, or 26.1% compared to the first quarter of 2015, principally due to the Oneida acquisition. The first quarter of 2016 also included annual merit increases of approximately 3% and one additional payroll day compared to the first quarter of last year. Occupancy and equipment costs increased 3.6% year-over-year, completely related to the additional Oneida facilities, as first quarter core utility and maintenance costs were down from last year, reflective of a milder winter. The $0.5 million year-over-year increase in intangible amortization was related to additional core deposit and customer list intangibles which resulted from the Oneida transaction. Other operating expenses were $3.1 million higher than the first quarter of 2015 and were principally related to the Oneida acquisition, but also included higher marketing and business development expenses as well as certain card-related issuance and processing costs.

The first quarter 2016 provision for loan losses of $1.3 million was $0.7 million higher than the first quarter of 2015, and reflected quarterly net charge-offs of $1.1 million and organic loan growth of $19.8 million during the quarter.

The Company’s effective tax rate for the first quarter of 2016 was 32.5%, compared to the 31.0% rate in the first quarter of 2015, with the majority of the increase related to higher New York State taxes based upon the Company’s larger consolidated asset size, as well as a higher proportion of income from fully taxable sources.

Financial Position

Average earning assets of $7.61 billion for the first quarter of 2016 were up $945.7 million from the first quarter of 2015, and were $309.6 million higher than the fourth quarter of 2015. Compared to the first quarter of 2015, quarterly average earning asset balances included growth of $621.8 million in average loan balances, including the impact of the acquired Oneida loans, while average investment securities and interest-earning cash balances increased by $323.9 million, predominantly from incremental investment purchases related to the net liquidity provided by the Oneida acquisition. Average deposit balances grew $962.4 million, or 16.0%, compared to the first quarter of 2015. Average borrowings of $297.0 million in the first quarter of 2016 were $30.8 million lower than the prior year quarter, and included $102.2 million of trust preferred obligations.

Ending loans at March 31, 2016 increased $657.3 million, or 15.8% year-over-year, reflecting productive organic growth in each of the Company’s lending portfolios, and approximately $400 million of loans acquired in the Oneida transaction. Investment securities totaled $2.90 billion at quarter-end, an increase of $246.5 million from the end of the first quarter of 2015. Total deposits of $7.12 billion at the end of March were $992.5 million above the end of last year’s first quarter, and included approximately $700 million of deposits acquired in the Oneida transaction. Ending borrowings of $135.9 million were $162.0 million lower than the end of the first quarter of last year, reflective of solid growth in core deposits and the acquired deposit funding.

Shareholders’ equity of $1.20 billion at March 31, 2016 was $187.3 million, or 18.5%, higher than the end of the first quarter of 2015, due to strong earnings generation and capital retention over the last four quarters, and 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 9.25% at March 31, 2016, compared to 9.19% at the end of March 2015, despite the growth of the Company’s balance sheet, including the intangible assets created from the Oneida acquisition. The Company’s Tier 1 leverage ratio was 9.95% for the current quarter, compared to 10.23% for last year’s first quarter as tangible assets grew at a slightly faster pace than regulatory capital.

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 upon 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 quarter of 2016.

Asset Quality

The Company’s asset quality metrics continue to be favorable and stable and reflect 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 of 2016, compared to $1.0 million for the first quarter of 2015 and $3.5 million for the fourth quarter of 2015. The fourth quarter 2015’s results included a net charge-off of $1.0 million related to one commercial relationship that had been partially reserved for in a prior quarter. Net charge-offs as an annualized percentage of average loans measured 0.10% in the first quarter of 2016, compared to 0.09% in the prior year first quarter and 0.31% in the fourth quarter of 2015. Full year 2015 net charge-offs were $6.4 million, or 0.15% of average loans, consistent with $6.2 million of net charge-offs in 2014, that were also 0.15% of average loans. Nonperforming loans as a percentage of total loans at March 31, 2016 were 0.54%, equivalent to the level reported at March 31, 2015. The total loan delinquency ratio of 1.00% at the end of the first quarter was down 19 basis points from the end of the first quarter of 2015. The first quarter provision for loan losses of $1.3 million was $0.7 million higher than the first quarter of 2015, reflective of positive loan growth in the first quarter of 2016 versus a $72 million net decline in last year’s first quarter. The allowance for loan losses to nonperforming loans was 175% at March 31, 2016, comparable with the 190% and 198% levels at the end of the fourth quarter of 2015 and the first quarter of 2015, respectively.

Oneida Financial Corp

In the fourth quarter of 2015, the Company completed the acquisition of Oneida Financial Corp., the parent company of Oneida Savings Bank. Under the terms of the agreement, shareholders of Oneida received merger consideration of 0.5635 shares of Community Bank System, Inc. common stock or $20.00 in cash for each share of Oneida common stock they held, subject to the election and proration provisions of the agreement which provided for an overall 60% stock and 40% cash apportionment. The total consideration for the acquisition was approximately $158.5 million, comprised of the issuance of 2.38 million shares of the Company’s common stock and $56.3 million in cash. The Company acquired approximately $399 million of loans, $308 million of cash equivalents and investment securities, and $699 million of deposits, as well as the business assets and activities associated with Oneida’s insurance, wealth management and employee benefit services businesses.

                                                   

Summary of Financial Data

                                                  
(Dollars in thousands, except per share data)                                                  
            2016       2015      
            1st Qtr       4th Qtr       3rd Qtr       2nd Qtr       1st Qtr      
Earnings                                                  
Loan income           $51,650       $49,321       $47,040       $45,791       $45,591      
Investment income           18,106       18,683       18,244       18,089       16,863      
Total interest income           69,756       68,004       65,284       63,880       62,454      
Interest expense           2,875       3,015       2,921       2,652       2,614      
Net interest income           66,881       64,989       62,363       61,228       59,840      
Provision for loan losses           1,341       3,327       1,906       591       623      
Net interest income after provision for loan losses           65,540       61,662       60,457       60,637       59,217      
Deposit service fees           13,734       13,605       13,459       13,213       12,470      
Revenues from mortgage banking and other banking services           1,579       1,061       2,045       799       1,055      
Wealth management and insurance services           10,957       6,825       4,552       4,385       4,446      
Employee benefit services           12,011       11,661       11,330       11,322       11,075      
Loss on sale of investments           0       (4)       0       0       0      
Total noninterest income           38,281       33,148       31,386       29,719       29,046      
Salaries and employee benefits           39,138       33,138       31,179       31,010       31,029      
Occupancy and equipment           7,663       6,702       6,652       6,844       7,395      
Amortization of intangible assets           1,442       1,021       843       880       919      
Acquisition expenses           77       5,719       562       361       395      
Other           19,349       18,400       16,843       16,953       16,210      
Total operating expenses           67,669       64,980       56,079       56,048       55,948      
Income before income taxes           36,152       29,830       35,764       34,308       32,315      
Income taxes           11,749       9,759       10,742       10,468       10,018      
Net income           24,403       20,071       25,022       23,840       22,297      
Basic earnings per share           $0.55       $0.48       $0.61       $0.58       $0.55      
Diluted earnings per share           $0.55       $0.47       $0.60       $0.58       $0.54      
Profitability                                                  
Return on assets           1.14%       0.98%       1.25%       1.25%       1.21%      
Return on equity           8.34%       7.41%       9.77%       9.44%       8.97%      
Return on tangible equity(3)           13.38%       10.98%       14.82%       14.40%       13.74%      
Noninterest income/operating income (FTE) (1)           35.5%       32.8%       32.4%       31.6%       31.6%      
Efficiency ratio (2)           61.4%       57.6%       56.4%       58.3%       59.4%      
Components of Net Interest Margin (FTE)                                                  
Loan yield           4.33%       4.43%       4.40%       4.40%       4.45%      
Cash equivalents yield           0.47%       0.25%       0.22%       0.28%       0.20%      
Investment yield           2.97%       2.98%       2.94%       3.15%       3.22%      
Earning asset yield           3.82%       3.86%       3.81%       3.92%       3.99%      
Interest-bearing deposit rate           0.14%       0.14%       0.14%       0.15%       0.16%      
Borrowing rate           1.33%       0.83%       0.72%       0.84%       1.01%      
Cost of all interest-bearing funds           0.20%       0.22%       0.21%       0.20%       0.21%      
Cost of funds (includes DDA)           0.16%       0.17%       0.17%       0.16%       0.17%      
Net interest margin (FTE)           3.67%       3.70%       3.65%       3.76%       3.83%      
Fully tax-equivalent adjustment           $2,524       $3,041       $3,162       $3,115       $3,085      
                                                   
                                               
Summary of Financial Data                                              
(Dollars in thousands, except per share data)                                              
        2016       2015      
        1st Qtr       4th Qtr       3rd Qtr       2nd Qtr       1st Qtr      
Average Balances                                              
Loans       $4,812,575       $4,459,575       $4,287,062       $4,211,962       $4,190,823      
Cash equivalents       22,355       12,448       12,395       11,325       18,080      
Taxable investment securities       2,172,983       2,214,690       2,187,818       2,031,234       1,845,295      
Nontaxable investment securities       603,297       614,891       635,627       607,585       611,330      
Total interest-earning assets       7,611,210       7,301,604       7,122,902       6,862,106       6,665,528      
Total assets       8,604,264       8,161,843       7,919,966       7,678,719       7,489,179      
Interest-bearing deposits       5,458,273       4,943,210       4,739,513       4,777,195       4,704,003      
Borrowings       296,964       607,771       675,958       438,931       327,791      
Total interest-bearing liabilities       5,755,237       5,550,981       5,415,471       5,216,126       5,031,794      
Noninterest-bearing deposits       1,527,585       1,405,416       1,363,022       1,321,738       1,319,499      
Shareholders' equity       1,177,246       1,074,243       1,016,448       1,012,470       1,008,394      
Balance Sheet Data                                              
Cash and cash equivalents       $138,513       $153,210       $156,836       $143,047       $150,533      
Investment securities       2,902,878       2,847,940       2,917,263       2,868,050       2,656,424      
Loans:                                              
Consumer mortgage       1,777,792       1,769,754       1,621,862       1,608,064       1,605,019      
Business lending       1,509,421       1,497,271       1,288,772       1,295,889       1,239,529      
Consumer indirect       941,151       935,760       872,988       837,449       804,300      
Home equity       403,273       403,514       345,446       340,578       338,979      
Consumer direct       189,535       195,076       184,479       181,623       176,084      
Total loans       4,821,172       4,801,375       4,313,547       4,263,603       4,163,911      
Allowance for loan losses       45,596       45,401       45,588       45,282       45,005      
Intangible assets, net       484,881       484,146       384,525       385,515       386,054      
Other assets       314,053       311,399       270,583       293,838       264,122      
Total assets       8,615,901       8,552,669       7,997,166       7,908,771       7,576,039      
Deposits:                                              
Noninterest-bearing       1,533,085       1,499,616       1,357,554       1,337,101       1,316,621      
Non-maturity interest-bearing       4,808,650       4,569,310       4,081,796       4,020,192       4,055,976      
Time       777,327       804,548       708,760       729,527       753,950      
Total deposits       7,119,062       6,873,474       6,148,110       6,086,820       6,126,547      
Borrowings       33,700       301,300       558,100       566,200       195,700      
Subordinated debt held by unconsolidated subsidiary trusts       102,152       102,146       102,140       102,134       102,128      
Accrued interest and other liabilities       160,322       135,102       143,790       153,278       138,262      
Total liabilities       7,415,236       7,412,022       6,952,140       6,908,432       6,562,637      
Shareholders' equity       1,200,665       1,140,647       1,045,026       1,000,339       1,013,402      
Total liabilities and shareholders' equity       8,615,901       8,552,669       7,997,166       7,908,771       7,576,039      
Capital                                              
Tier 1 leverage ratio       9.95%       10.32%       10.09%       10.20%       10.23%      
Tangible equity/net tangible assets (3)       9.25%       8.59%       9.14%       8.63%       9.19%      
Diluted weighted average common shares O/S       44,356       42,373       41,470       41,265       41,247      
Period end common shares outstanding       44,070       43,775       41,019       40,877       40,724      
Cash dividends declared per common share       $0.31       $0.31       $0.31       $0.30       $0.30      
Book value       $27.24       $26.06       $25.48       $24.47       $24.88      
Tangible book value(3)       $17.16       $15.90       $17.05       $15.96       $16.31      
Common stock price (end of period)       $38.21       $39.94       $37.17       $37.77       $35.39      
                                               
Summary of Financial Data                                              
(Dollars in thousands, except per share data)                                              
        2016       2015      
        1st Qtr       4th Qtr       3rd Qtr       2nd Qtr       1st Qtr      
Asset Quality                                              
Nonaccrual loans       $23,766       $21,728       $23,133       $21,440       $20,984      
Accruing loans 90+ days delinquent       2,327       2,195       2,075       1,558       1,699      
Total nonperforming loans       26,093       23,923       25,208       22,998       22,683      
Other real estate owned (OREO)       2,031       2,088       2,531       2,324       1,767      
Total nonperforming assets       28,124       26,011       27,739       25,322       24,450      
Net charge-offs       1,146       3,514       1,600       314       959      
Allowance for loan losses/loans outstanding       0.95%       0.95%       1.06%       1.06%       1.08%      
Nonperforming loans/loans outstanding       0.54%       0.50%       0.58%       0.54%       0.54%      
Allowance for loan losses/nonperforming loans       175%       190%       181%       197%       198%      
Net charge-offs/average loans       0.10%       0.31%       0.15%       0.03%       0.09%      
Delinquent loans/ending loans       1.00%       1.16%       1.19%       1.09%       1.19%      
Loan loss provision/net charge-offs       117%       95%       119%       188%       65%      
Nonperforming assets/total assets       0.33%       0.30%       0.35%       0.32%       0.32%      
Asset Quality (excluding loans acquired since 1/1/09)                                              
Nonaccrual loans       $20,045       $18,804       $20,504       $18,558       $18,278      
Accruing loans 90+ days delinquent       1,837       1,802       1,876       1,463       1,325      
Total nonperforming loans       21,882       20,606       22,380       20,021       19,603      
Other real estate owned (OREO)       1,497       1,546       1,720       1,518       1,357      
Total nonperforming assets       23,379       22,152       24,100       21,539       20,960      
Net charge-offs       898       3,420       1,473       425       877      
Allowance for loan losses/loans outstanding       1.04%       1.05%       1.10%       1.11%       1.14%      
Nonperforming loans/loans outstanding       0.52%       0.49%       0.55%       0.50%       0.50%      
Allowance for loan losses/nonperforming loans       200%       212%       201%       223%       226%      
Net charge-offs/average loans       0.09%       0.34%       0.14%       0.04%       0.09%      
Delinquent loans/ending loans       1.00%       1.19%       1.14%       1.04%       1.11%      
Loan loss provision/net charge-offs       112%       62%       127%       191%       61%      
Nonperforming assets/total assets       0.29%       0.28%       0.31%       0.28%       0.29%      
(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 $40.5 million at 3/31/16) generated from tax deductible goodwill.