Community Bank announces Pa. branch acquisition, Q2 earnings

DeWITT — Community Bank System, Inc. (NYSE: CBU) announced July 24 that it has agreed to buy eight branches in Northeast Pennsylvania from Bank of America. Under the terms of the agreement, Community Bank will acquire about $369 million in deposits at a deposit premium of 2.39 percent, as well as a small amount of loans.

“We are excited by the opportunity to strengthen Community Bank’s service footprint across our Northeast Pennsylvania market area,” Mark E. Tryniski, president and CEO of DeWitt–based Community Bank, said in a news release. “This acquisition meaningfully improves our presence and density in Northeast Pennsylvania and provides us with improved operating leverage. We believe this is a very attractive transaction at an opportune time in the interest rate cycle and will be additive to shareholder value through expected earnings accretion in 2014.”

Specifically, Community Bank expects the transaction to add two percent to three percent to its earnings, Tryniski said on a conference call with investors, analysts, and the media on the day of the announced acquisition. The bank said it expects to close the acquisition in December, subject to regulatory review and approval.

The branches that Community Bank is acquiring include five Bank of America offices in Luzerne County, one in Lackawanna County, and two in Carbon County. Community Bank said it expects to keep all of the current customer-service employees at the acquired branches.

Community Bank currently has 26 branches and about $850 million in deposits in a five-county area of Northeast Pennsylvania.

The banking company previously announced that it will rebrand its First Liberty Bank and Trust operations in that region to Community Bank, N.A. It expects to complete the change by early September. Community Bank first entered the Pennsylvania market with the acquisition of First Liberty in 2001 and said it decided to maintain the brand to preserve the goodwill associated with the name.

RBC Capital Markets acted as exclusive financial advisor to Community Bank System on the agreement to purchase the Bank of America branches.

Acquisitions have played a big role in Community Bank’s growth. From 2006 through September 2012, the banking company completed six separate branch or whole-bank acquisitions, which added about 70 retail banking locations and $2.3 billion in deposits.

Earnings

On July 23, Community Bank System announced that its second-quarter profit was virtually unchanged from a year earlier as higher operating expenses offset increased revenue. The banking company reported net income of $21.1 million, the same as in the year-ago period. But earnings per share (EPS) dipped to 52 cents in this year’s second quarter from 53 cents in the second quarter of 2012. Analysts were expecting the banking company to report EPS of 50 cents in the latest quarter, according to Wall St. Cheat Sheet.

Community Bank reported revenue of $85.5 million in the latest quarter, up 5 percent from the second quarter of 2012. Higher revenue was driven by increased non-interest income from a larger deposit account base, along with continued internal growth in wealth management and benefits-administration services, the banking company said.

Net interest income rose 1.1 percent to $58.4 million in this year’s second quarter, boosted by both acquired and organic loan growth over the past 12 months. Community Bank recorded a provision for loan losses of $1.3 million in the second quarter, down by $800,000 from a year ago, reflecting lower net charge-offs.

Community Bank’s total operating expenses rose more than 10 percent to $54.4 million in the second quarter, primarily driven by higher operating costs associated with the branch acquisitions — 16 HSBC branches and three First Niagara offices — that it completed in the third quarter of 2012. Salaries and employee benefits increased by almost 13 percent and occupancy costs grew 10 percent, mainly due to the branch acquisitions.

“The positive operating momentum from the first quarter continued through the midpoint of 2013, with solid organic loan growth, a strong increase in fee income, responsible expense management, and very positive asset quality metrics,” Mark E. Tryniski, president and CEO of Community Bank, said in the earnings report.

Non-interest income rose more than 14 percent to $27.1 million in the second quarter compared to the year-earlier period. Deposit service revenue grew by almost 12 percent as a result of a 15.5 percent increase in deposit-account balances, reflective of both the branch acquisitions and organic growth across Community Bank. Wealth-management revenue surged 30 percent in the latest quarter, driven by solid gains in trust services, asset management and advisory services, and favorable market conditions, Community Bank said. Employee-benefits administration and consulting revenue rose 8.5 percent to $9.4 million, aided by new and expanded customer relationships.

“The most significant strength of the quarter was the record earnings performance by our wealth management and benefits-administration businesses whose pre-tax earnings for the quarter were up more than 60 percent over last year,” Tryniski said on the July 24 conference call. “We are achieving significant operating leverage in these businesses right now with revenues growing strongly and expenses flat or down. We will continue to grow and invest in these businesses as a core element of our operating strategy.”

Loans increased by 10.5 percent, or $374.3 million, year-over-year, reflecting both loans from the acquired branches and strong organic growth in the consumer-lending portfolios, Community Bank said in the earnings report.

The bank’s total deposits at the end of the second quarter were 15.5 percent higher than June 30, 2012 levels, primarily due to the branch acquisitions in the third quarter of last year.

Asset quality

Community Bank’s net charge-offs totaled about $800,000 for the second quarter, compared to $2.1 million for the year-ago period and $1.4 million in the first quarter of 2013. Nonperforming loans as a percentage of total loans stood at 0.62 percent on June 30, down from 0.71 percent on March 31 and 0.9 percent a year earlier. The total delinquency ratio of 1.5 percent at the end of the second quarter was down 0.21 percent from a year prior and off 0.05 percent from the end of the first quarter of 2013.

Looking ahead

“With respect to the remainder of the year, we will continue to work hard across the company to offset the expected impact of margin pressure, which we hope is then modestly relived by the recent steepening of the yield curve. Our pipelines remained strong heading into the second quarter and we expect to continue to grow banking fee income and the revenues of our wealth management and benefits-administration businesses,” Tryniski said on the conference call. “Our balance sheet is as strong as it’s ever been with record regulatory capital levels and tremendous core funding. We are well positioned to the second half of 2013 and beyond.”

Community Bank System has more than $7 billion in total assets and more than 180 bank branch offices across upstate New York and Northeast Pennsylvania. Its other subsidiaries include: Benefit Plans Administrative Services, Inc., a national employee-benefits consulting and trust administration firm with offices in New York, New Jersey, Pennsylvania, and Texas; the CBNA Insurance Agency, with offices in five northern New York locales; Community Investment Services, Inc., a wealth-management firm delivering financial products throughout the company’s branch network; and Nottingham Advisors, an investment management and advisory firm with offices in Buffalo and North Palm Beach, Fla.

Contact Rombel at arombel@cnybj.com