SYRACUSE - Community Bank System, Inc. reported first quarter 2013 net income of $20.2 million, an increase of 7.5 percent compared with $18.8 million earned for the first quarter of 2012. Diluted earnings per share totaled $0.50 for the first quarter, up 4.2 percent from $0.48 reported in the first quarter 2012. Net income and earnings per share were the highest ever recorded by the company in a first quarter.
Total revenue for the first quarter was $84.5 million, an increase of $7.2 million, or 9.2 percent, over the first quarter 2012. Higher revenue was principally the result of an 11.6 percent increase in average earning assets, partially offset by a 10-basis point decline in the company's net interest margin. Increased net interest income was coupled with higher non-interest income from increased deposit accounts and balances, along with solid organic growth in wealth management and benefits administration services. Balance sheet growth was driven by the acquisition of HSBC and First Niagara branches in the third quarter 2012, as well as solid organic expansion over the past four quarters. The quarterly provision for loan losses of $1.4 million was $0.3 million lower than the first quarter of 2012, reflective of lower net charge-offs and the continuation of generally stable and favorable asset quality metrics. Total operating expenses of $54.6 million for the quarter were $5.1 million, or 10.4 percent, higher than the first quarter of 2012, reflective of the additional operating costs associated with the completed branch acquisitions.
"Community Bank's team began 2013 with strong momentum, producing record operating performance for a first quarter period," said President and Chief Executive Officer Mark E. Tryniski. "Our results continued to reflect successful efforts to efficiently grow our balance sheet and revenue sources, both organically and through acquisitions. Non-interest income growth remained robust during the quarter reflecting solid performances by our benefit plan services and wealth management groups as well as year-over-year growth in our deposit service fees. We were also pleased with the outcome of a balance sheet restructuring which reduced borrowings and investment securities, and which we believe provides both qualitative and economic benefit for shareholders. In 2013 we will continue to execute our long-term approach to value creation with a focus on expansion of the Company's earnings power and dividend capacity in all economic environments."
First quarter 2013 net interest income was $58.4 million, an increase of $4.5 million, or 8.4 percent, compared to the first quarter of 2012. Growth in net interest income was principally the result of a $680.1 million, or 11.6 percent, increase in average interest-earning assets, comprised of an additional $406.5 million in average loans, from both organic and acquired sources, and an increase of $273.6 million in investment securities (including cash equivalents). Growth in average earning assets was partially offset by a 10-basis point decline in the Company's net interest margin to 3.86 percent, versus the first quarter of 2012. Lower market interest rates drove a 45-basis point decline in earning asset yields, while the first quarter cost of funds fell by 35 basis points compared to the prior year quarter. Lower interest costs were enhanced by a $617.1 million increase in average interest-bearing deposits and a decrease in average borrowings of $173.3 million.
First quarter non-interest income increased $2.6 million to $26.1 million, representing an increase of 11.3 percent compared to last year's first quarter. Deposit service revenues grew $1.2 million, or 11.8 percent, to $11.6 million, comprising nearly half of the increase in total non-interest income. Core deposit account growth of 21 percent drove the improvement, reflecting the benefit of the branch acquisitions and organic growth across the franchise. Employee benefits administration and consulting revenues grew 8.9 percent to $9.8 million from new customer additions, favorable market conditions and growth from our Metro New York area business acquired in December 2011. Wealth management revenues were up $0.6 million, or 18.1 percent, over first quarter 2012, driven by solid gains in trust services, asset management and advisory services, and favorable market conditions.
Quarterly operating expenses of $54.6 million increased $5.1 million, or 10.4 percent, over the first quarter of 2012, principally reflecting the recurring operating expenses of the branches acquired in the third quarter of 2012. Salaries and employee benefits grew $3.1 million, or 11.2 percent, from acquisition growth and current year merit increases. Occupancy costs grew 9.3 percent primarily as a result of the branch acquisitions. Cost increases reflected a higher number of branches as well as higher maintenance costs required to operate the entire branch network in more severe winter conditions compared to the first quarter of 2012. Other expenses further reflected the increased costs of operating an expanded franchise, with total other expenses rising $1.7 million, or 11.7 percent. The increase included higher marketing and business development costs including concentrated efforts in the Company's newer and expanded markets, while higher FDIC costs were driven by the growth of the balance sheet.
The first quarter 2013 effective income tax rate of 29.2 percent increased 70 basis points compared to 28.5 percent in last year's first quarter, reflecting a higher proportion of income being generated from fully taxable sources.