"Our solid second quarter operating results were driven by meaningful loan growth, particularly in our business and auto lending portfolios, a continuation of exceptional credit quality, disciplined expense management, and continued improvement in our non-interest income generation," said President and Chief Executive Officer Mark E. Tryniski.  "A 7% annualized growth in loans in the second quarter has allowed us to report over $100 million in loan growth year-to-date, a very productive outcome in this challenging low interest rate environment."  Mr. Tryniski also commented, "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 second quarter of 2016 was $107.1 million, an increase of $16.1 million, or 17.7%, over the prior year quarter, and included the impact of the Oneida Financial transaction completed in the fourth quarter of last year.  The higher revenue was generated as a result of an 11.5% increase in average earning assets and continued acquired and organic growth in noninterest income, which more than offset a three basis-point reduction in net interest margin from the prior year quarter.  A combination of acquired and organic growth resulted in a $6.5 million, or 41.1% increase in wealth management, insurance, and employee benefit services revenues.  Deposit service fees increased 13.6% year-over-year, the result of increased card-related revenues and offset by modestly lower fees from account overdraft protection programs, including the additional activities from the Oneida transaction.  The quarterly provision for loan losses of $2.3 million was $1.7 million higher than the historically low second quarter of 2015, reflective of comparably higher levels of net charge-offs and portfolio growth.  Non-performing asset and delinquent loan ratios were generally stable.  Total operating expenses of $66.4 million for the quarter were $10.3 million, or 18.4% above the second quarter of 2015, and included the operating expenses of the Oneida Financial acquisition.  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 32.7% in the second quarter of 2016, compared to 30.5% in the second quarter of 2015, an outcome that resulted in a two cent per share headwind compared to the prior year.

Second quarter 2016 net interest income was $68.3 million, an increase of $7.1 million, or 11.6%, compared to the second quarter of 2015.  Modestly improved funding costs were offset by a five 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 $654.6 million, or 15.5%, average loan yields declined five basis points year-over-year, resulting in a $6.7 million increase in quarterly loan interest income.  Investment interest income was $0.5 million higher than the second quarter of 2015 as average investment securities (including cash equivalents) increased by $136.7 million, and the yield declined ten basis points.  Interest expense was $0.2 million higher than the previous year's quarter, driven by a $950.7 million increase in average deposits and a $189.7 million decline in average borrowings, including the Oneida acquisition.

 

Wealth management, insurance and employee benefit services revenues increased $6.5 million, or 41.1%, to $22.2 million compared to second quarter 2015, principally from the acquired activities of Oneida Financial.  Revenues from mortgage banking and other services increased $0.8 million from the second quarter of 2015, and included nearly $0.4 million in non-recurring gains.

Second quarter 2016 operating expenses of $66.4 million increased $10.3 million over the second quarter of 2015, including the operating activities of Oneida Financial.  Salaries and employee benefits increased $6.9 million, or 22.4%, and included personnel added from the Oneida transaction as well as planned merit increases.  All other expenses increased 13.4% and reflected the occupancy, equipment and other operating costs of Oneida, including higher intangible amortization, compared to the second quarter of 2015.  The second quarter and year-to-date 2016 effective income tax rates of 32.7% and 32.6%, respectively, were higher than the 30.5% and 30.8%, respectively, in last year's comparable periods.  Second quarter 2016 operating expenses were $1.3 million lower than the first quarter of this year, and reflected seasonally expected reductions in certain payroll tax expenses and utility costs.  Both the first and second quarters of 2016 included 65 payroll days.

Financial Position

Average earning assets of $7.65 billion for the second quarter of 2016 were up $791.3 million from the second quarter of 2015, and were $42.2 million higher than the first quarter of 2016.  Compared to the prior year, total average earning asset balances included acquired and organic growth of $654.6 million in average loan balances, while average investment securities and interest-earning cash balances increased by $136.7 million.   Average deposit balances grew $950.7 million compared to the second quarter of 2015, and were $63.8 million higher than the first quarter of 2016.  Average borrowings in the second quarter of 2016 of $249.3 million, were $47.7 million, or 16.1%, lower than the first quarter of this year.

Ending loans at June 30, 2016 increased $641.2 million, or 15.0%, 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.  Investment securities totaled $2.93 billion at June 30, 2016, a level consistent with the previous four quarter-ends.

Shareholders' equity of $1.24 billion at June 30, 2016 was $236.6 million, or 23.7%, higher than the prior year second quarter-end, from 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 9.58% at June 30, 2016, up from 8.63% at June 30, 2015.  The Company's Tier 1 leverage ratio stood at 10.14% at the end of the second 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 half 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 risk management and underwriting standards.  Net charge-offs were $1.4 million for the second quarter, compared to a historically low $0.3 million for the second quarter of 2015 and $1.1 million for the first quarter of 2016.  Net charge-offs as an annualized percentage of average loans measured 0.11% in the second quarter of 2016, compared to 0.03% in the prior year second quarter and 0.10% in the first quarter of 2016.  Nonperforming loans as a percentage of total loans at June 30, 2016 were 0.49%, improved from 0.54% at both June 30, 2015 and March 31, 2016.  The total loan delinquency ratio of 1.10% at the end of the second quarter was up one basis point from the end of the second quarter of 2015.  The second quarter provision for loan losses of $2.3 million was $1.7 million higher than the second quarter of 2015, and $1.0 million higher than the first quarter of 2016, due primarily to comparably higher net charge-off levels than the previous year's second quarter, and solid organic loan growth.  The allowance for loan losses to nonperforming loans was 193% at June 30, 2016, compared with the 197% and 175% levels at the end of the second quarter of 2015 and the first quarter of 2016, respectively.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Thursday, July 21st) to discuss second quarter results.  The conference call can be accessed at 888-461-2024 (1-719-325-2393 if outside United States and Canada) using the conference ID code 3525466.  Investors may also listen live via the Internet at: http://www.webcaster4.com/Webcast/Page/995/15903.

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.

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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; 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.

 

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(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 $41.5 million at 6/30/16) generated from tax deductible goodwill.