Market Overview

Community Bank System Reports Fourth Quarter and Full Year 2018 Results

Share:

Community Bank System, Inc. (NYSE:CBU) reported fourth quarter 2018 net
income of $40.8 million and fully diluted earnings per share of $0.78.
This compares to $72.0 million in net income or $1.40 per share for the
fourth quarter of 2017. The fourth quarter 2017 results included a $38.0
million, or $0.74 per share, one-time gain from the revaluation of net
deferred tax liabilities related to the enactment of the Tax Cuts and
Jobs Act in December 2017. Excluding this one-time tax benefit and
acquisition expenses, fourth quarter 2018 operating earnings per share
(non-GAAP) were $0.11, or 16.4%, above the fourth quarter of 2017. Full
year diluted earnings per share totaled $3.24 in 2018, compared to $3.03
in 2017. Full year 2018 diluted operating earnings per share (non-GAAP)
of $3.23 were $0.59, or 22.3%, above the $2.64 per share of operating
earnings generated in 2017.

2018 Performance Highlights:

  • GAAP EPS
    • $0.78 per share for the fourth quarter of 2018, compared to $1.40
      per share for the fourth quarter of 2017
    • $3.24 per share for full year 2018, compared to $3.03 for 2017
  • Operating EPS (non-GAAP)
    • $0.78 per share for the fourth quarter of 2018, up 16.4% over the
      fourth quarter of 2017
    • $3.23 per share for full year 2018, up 22.3% over 2017
  • Total Deposit Funding Costs
    • 0.16% for the fourth quarter of 2018
    • 0.13% for full year 2018
  • Return on Assets
    • 1.53% for the fourth quarter of 2018
    • 1.58% for full year 2018
  • Return on Tangible Equity
    • 17.6% for fourth quarter 2018
    • 19.1% for full year 2018
  • Non-banking Noninterest Revenues
    • Up 7.3% over fourth quarter of 2017
    • Up 15.0% for full year 2018

"Our strong fourth quarter and 2018 performance reflected a full year of
operating leverage from the 2017 acquisition of Merchants Bancshares and
Northeast Retirement Services, as well as continued solid growth in our
non-banking fee businesses. Fourth quarter fully-diluted operating
earnings per share increased $0.11, or 16.4%, over 2017 despite a
reduction in noninterest revenues of $3.1 million, or $0.05 per share,
related to Durbin amendment mandated debit interchange price
restrictions," said Mark E. Tryniski President and Chief Executive
Officer. "Total revenues for 2018 of $569.1 million were up $51.0
million or 9.8% over 2017, while operating earnings increased 22.3%, or
$0.59 per share, despite a decrease of $0.11 per share in
banking-related noninterest revenues related to the Durbin amendment.
The Company's historic discipline around deposit funding and asset
quality was also evident in the 2018 results with average cost of
deposits of 0.13%, and total net charge-offs of 0.15% of average loans.
Overall, it was a very solid effort that positioned the organization for
continued strong performance in 2019. Also, as announced yesterday, we
have entered into a definitive agreement to acquire Kinderhook Bank
Corp. which will provide an enhanced banking presence in five additional
Upstate New York counties around the Capital District. The greater
Albany region offers attractive demographics and we're excited by the
prospect of having a more significant presence in this area."

Total revenues for the fourth quarter of 2018 were $141.6 million, an
increase of $1.7 million, or 1.2%, over the fourth quarter of 2017. The
Company recorded a $1.4 million, or 1.6%, increase in net interest
income and a $0.3 million, or 0.5%, increase in noninterest revenues.
The increase in net interest income was due to a 22 basis point increase
in the yield on loans, offset in part by a decrease in average earning
assets, lower investment securities yields and higher funding costs.
Nonbanking noninterest revenues increased $2.5 million, or 7.3%, due to
organic revenue growth in our employee benefit services segment, as well
as acquired and organic growth in our wealth management and insurance
businesses. This increase in nonbanking noninterest revenues was
partially offset by a decrease in banking noninterest revenues of $2.2
million, or 11.2%, due almost entirely to Durbin amendment mandated
debit interchange price restrictions.

On a linked quarter basis, total revenues decreased $0.4 million, or
0.3%. Net interest income was up $1.2 million, or 1.4%, and noninterest
revenues were down $1.6 million, or 2.8%. The Company's tax equivalent
net interest margin increased six basis points from 3.71% in the third
quarter of 2018 to 3.77% in the fourth quarter of 2018. This included
two basis points of improvement due to the Company's receipt of the
semi-annual Federal Reserve Bank dividend payment totaling $0.4 million.
Banking-related noninterest revenues were down $0.5 million, or 2.9%,
and nonbanking noninterest revenues were down $0.6 million or 1.5%. In
addition, during the third quarter of 2018, the Company recorded $0.7
million in unrealized gains on equity securities and $0.3 million in
loss on prepayment of debt securities associated with the accelerated
amortization of debt issuance costs, resulting in a $0.4 million net
gain on these activities. This compares to $0.1 million of unrealized
losses on equity securities during the fourth quarter.

The Company recorded a $2.5 million provision for loan losses in the
fourth quarter 2018. This compares to a $5.4 million provision for loan
losses recorded in the fourth quarter of 2017 and $2.2 million in the
linked third quarter of 2018. The non-performing loan to total loans
ratio was 0.40% at the end of the fourth quarter of 2018, down from
0.44% at the end of the fourth quarter of 2017 and consistent with
linked third quarter results. The total loan delinquency ratio was 1.00%
at the end of the fourth quarter of 2018. This is 10 basis points lower
than the prior year fourth quarter end and seven basis points higher
than the linked third quarter.

Total operating expenses for the fourth quarter of 2018 were $87.6
million. This compares to $86.1 million in total operating expenses
(excluding acquisition expenses of $0.8 million) recorded in the fourth
quarter of 2017. The $1.5 million, or 1.7%, increase in total operating
expenses was due to higher amounts of salaries and employee benefits and
occupancy and equipment expenses, partially offset by a $0.6 million
decrease in amortization of intangible assets.

On a linked quarter basis, total operating expenses increased $2.4
million, or 2.8%. During the third quarter of 2018, the Company
recovered $0.8 million of vendor contract termination charges, which
were recorded as an acquisition expense during the second quarter of
2017. Excluding this recovery, total operating expenses increased $1.6
million, or 1.8%. Salaries and employee benefits expense increased $1.0
million including one additional day of payroll, while occupancy and
equipment expense increased $0.4 million due to seasonal fluctuations
and other expenses were $0.2 million higher.

The Company recorded $87.4 million in net interest income during the
fourth quarter of 2018. This represents an increase of $1.4 million, or
1.6%, compared to the fourth quarter of 2017. Interest income on loans
was up $3.6 million, or 5.2%, while interest income on investments,
including cash equivalents, was down $0.8 million, or 3.9%. Interest
expense increased $1.4 million as deposit and borrowing costs increased,
reflective of higher market interest rates for these funding sources.
The net interest margin increased three basis points, from 3.74% in the
fourth quarter of 2017 to 3.77% in the fourth quarter of 2018. Earning
asset yields increased 10 basis points, from 3.89% in the fourth quarter
of 2017 to 3.99% in the fourth quarter of 2018. Average loan yields
increased 22 basis points from 4.43% to 4.65% over the same periods due
largely to an increase in market interest rates, including four 25 basis
point increases in the Prime rate. Similarly, the yield on cash
equivalents increased 66 basis points from 1.19% in the fourth quarter
of 2017 to 1.85% in the fourth quarter of 2018. Conversely, the yield on
investment securities decreased 19 basis points, from 2.81% to 2.62%
between comparable quarterly periods. This was largely due to a decrease
in the tax-equivalent yield on non-taxable municipal securities caused
by a drop in the statutory Federal corporate tax rate between the
periods. The Company's cost of funds increased seven basis points, from
0.16% in the fourth quarter of 2017 to 0.23% in the fourth quarter of
2018. The Company's cost of deposits was 0.16% during the fourth quarter
of 2018, versus 0.10% in the fourth quarter of 2017.

Net interest income increased $1.2 million, or 1.4%, on a linked quarter
basis. Interest income on loans was up $1.1 million due primarily to an
eight basis point increase in the yield. Interest income on investment
securities, including cash equivalents, was up $0.5 million primarily
due to receipt of the semi-annual dividend payment from the Federal
Reserve Bank. Net interest margin increased six basis points from 3.71%
in the third quarter of 2018 to 3.77% in the fourth quarter. The yield
on earning assets increased eight basis points between the linked
quarters to 3.99% from 3.91%, while the total cost of funds increased
two basis points to 0.23% from 0.21%.

The Company generated $13.7 million of wealth management and insurance
services revenues in the fourth quarter of 2018. This represents a $1.3
million, or 10.1%, increase over the fourth quarter 2017 revenues of
$12.4 million. During the fourth quarter of 2017 and the first two
quarters of 2018, the Company acquired four small insurance and wealth
management practices contributing to revenue growth. Employee benefit
services revenues of $23.5 million, increased $1.3 million, or 5.6%,
from the fourth quarter of 2017. These results were attributable to
organic increases in the number of supported plans and related
participant levels. On a linked quarter basis, wealth management and
insurance services revenues were down $0.8 million due to seasonal and
market-related influences, and employee benefits services revenues were
up $0.2 million.

The effective tax rate for the fourth quarter of 2018 was 20.7%. This
was down from a 28.6% effective tax rate in the fourth quarter of last
year, excluding the $38.0 million one-time gain from the revaluation of
net deferred tax liabilities. The decrease in the effective tax rate was
largely attributable to the application of the lower federal tax rate
due to the Tax Cuts and Jobs Act passed in the fourth quarter of 2017.
The effective tax rate for the full year of 2018 was 20.8%.

The Company also provides supplemental reporting of its results on an
"operating," "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), accretion on non-impaired purchased loans, expenses associated
with acquisitions, the unrealized gain (loss) on equity securities, loss
on debt prepayment and the one-time benefit from the revaluation of net
deferred tax liabilities. The amounts for such items are presented in
the tables that accompany this release. Although these items are
non-GAAP measures, the Company's management believes this information
helps investors understand the effect of acquisition and other
non-recurring activity in its reported results. Diluted adjusted net
earnings per share were $0.81 in the fourth quarter of 2018, compared to
$0.71 in the fourth quarter of 2017, a 14.1% increase.

Financial Position

Average earning assets were down $26.2 million, or 0.3%, on a linked
quarter basis, from $9.33 billion during the third quarter of 2018 to
$9.31 billion during the fourth quarter of 2018. Average loan balances
during the fourth quarter were $6.28 billion, down $13.6 million, or
0.2%, from the third quarter. Average deposit balances were down $57.9
million, or 0.7%, from third quarter levels, due largely to increased
utilization of certain off balance sheet products, which increased $93.9
million over the same period. Ending deposits were also down $141.5
million or 1.7%. Average borrowings in the fourth quarter of 2018 of
$389.4 million, were down $4.1 million or 1.0% from the third quarter
average of $393.5 million.

Ending loans at December 31, 2018 were $6.28 billion. This was down
$19.8 million or 0.3% from the end of the third quarter, but up $24.4
million, or 0.4%, when compared to December 31, 2017. During the fourth
quarter and consistent with seasonal expectations, outstanding balances
in our consumer indirect, consumer direct and home equity portfolios
decreased $28.5 million. This was partially offset, by a $15.4 million
increase in consumer mortgage balances. Business lending was down $6.6
million, or 0.3%, as principal reductions slightly exceeded new loan
advances and originations during the quarter. The increase in ending
loans on a comparative year end basis was largely driven by growth in
the Company's consumer indirect and consumer mortgage loan portfolios.

Investment securities totaled $2.98 billion at December 31, 2018, up
$33.6 million, or 1.1%, from the end of the linked third quarter of
2018, but down $99.7 million or 3.2% from December 31, 2017. The net
unrealized loss in this portfolio was $16.0 million at December 31,
2018, as compared to a $52.8 million unrealized loss at September 30,
2018, down $36.8 million during the fourth quarter due to changes in
market interest rates. These compare to a net unrealized gain of $23.9
million at December 31, 2017. The portfolio transitioned from a net
unrealized gain position in December 2017 to a net unrealized loss
position during early 2018 due to an increase in market interest rates.
The effective duration of the portfolio was 3.3 years at the end of the
fourth quarter.

Shareholders' equity of $1.71 billion at December 31, 2018 was $79.5
million, or 4.9%, higher than the prior year period. The Company's net
tangible equity to net tangible assets ratio was 9.69% at December 31,
2018, up from 8.61% a year earlier and 9.13% at the end of the third
quarter of 2018. The Company's Tier 1 leverage ratio was 11.09% at the
end of the fourth quarter, up from 10.00% a year earlier. These results
are primarily a result of strong earnings generation and capital
retention over the last four quarters.

As previously announced in January 2018, the Company's Board of
Directors approved a stock repurchase program authorizing the repurchase
of up to 2.5 million shares of the Company's common stock during a
twelve-month period starting January 1, 2018. 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 pursuant
to the program in 2018. In December 2018, the Company reauthorized a new
repurchase program for 2019 for up to 2.5 million shares of the Company
stock.

Asset Quality

The Company's asset quality metrics continue to illustrate the long-term
effectiveness of the Company's disciplined risk management and
underwriting standards. Total net charge-offs were $3.3 million for the
fourth quarter. This compares to $5.8 million in the fourth quarter of
2017, $3.1 million of which was related to a charge-off recorded on a
single credit relationship. Net charge-offs as an annualized percentage
of average loans measured 0.21% in the fourth quarter of 2018 and 0.37%
in the fourth quarter of 2017. Nonperforming loans as a percentage of
total loans at the end of the fourth quarter and linked third quarter
were 0.40%, as compared to 0.44% at December 31, 2017. The total loan
delinquency ratio of 1.00% at the end of the fourth quarter was 10 basis
points lower than the level one year earlier. The fourth quarter
provision for loan losses of $2.5 million was $2.9 million lower than
the fourth quarter of 2017, and $0.3 million higher than the third
quarter of 2018. The allowance for loan losses to nonperforming loans
was 197% at December 31, 2018, compared with 201% and 173% at the end of
the third quarter of 2018 and fourth quarter of 2017, respectively. On a
full year 2018 basis, the Company recorded 0.15% of net charge offs
compared to 0.18% for the full year of 2017. The Company's allowance for
loan losses was $49.3 million or 0.78% of total loans outstanding at
December 31, 2018, as compared to $47.6 million and 0.76% of total loans
outstanding at the end of the prior year.

Dividend Increase

During the fourth quarter of 2018, the Company declared a quarterly cash
dividend of $0.38 per share on its common stock. The Board of Directors
raised the cash dividend by $0.04 per share, or 11.8%, during the third
quarter of 2018 which marked the 26th consecutive year of
dividend increases for the Company. President and Chief Executive
Officer, Mark E. Tryniski, commented, "The payment of a meaningful and
growing dividend is an important component of providing consistent and
favorable long-term returns to our shareholders. The increase reflected
the continued strength of our current operating performance and capital
position." The four cent, or 11.8%, increase in the Company's quarterly
cash dividend over the same quarter of the prior year brought the
dividend to a level that represents an annualized yield of 2.4% based
upon the $63.29 closing price of the Company's stock on January 22, 2019.

Kinderhook Bank Corp.

On January 22, 2019, the Company announced that it had entered into a
definitive agreement to acquire Kinderhook Bank Corp. ("Kinderhook"),
parent company of National Union Bank of Kinderhook headquartered in
Kinderhook, New York, for $93.4 million in cash. The acquisition will
extend the Company's branch footprint in the greater Capital District
region of New York where the Company started a business banking
operation in the first quarter of 2018. Upon completion of the merger,
Community Bank will add 11 branch locations in the region with
approximately $640 million of assets and deposits of $560 million. The
Company expects to complete the acquisition late in the second quarter
of 2019.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET)
today, January 23, 2019, to discuss fourth quarter and full year 2018
results. The conference call can be accessed at 866-337-5532
(786-460-7176, if outside United States and Canada) using the conference
ID code 7885932. Investors may also listen live via the Internet at: https://www.webcaster4.com/Webcast/Page/995/28890.

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 230 customer facilities
across Upstate New York, Northeastern Pennsylvania, Vermont, and Western
Massachusetts through its banking subsidiary, Community Bank, N.A. With
assets of over $10.6 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 municipal 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 units. The Company's Benefit Plans
Administrative Services, Inc. subsidiary is a leading provider of
employee benefits administration, trust services, collective investment
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.

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.

 

               

Summary of Financial Data

(Dollars in thousands, except per share data)

                   
Quarter Ended Year-to-Date

View Comments and Join the Discussion!
 
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com