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Section 1: 10-Q



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________to___________________

Commission File Number: 001-13695

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(Exact name of registrant as specified in its charter)

Delaware
 
16-1213679
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

5790 Widewaters Parkway, DeWitt, New York
 
13214-1883
(Address of principal executive offices)
 
(Zip Code)

(315) 445‑2282
(Registrant's telephone number, including area code)

NONE
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
CBU
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   No 
 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes    No 
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
     
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    No 
 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 51,595,171 shares of Common Stock, $1.00 par value per share, were outstanding on July 31, 2019.




Table of Contents
TABLE OF CONTENTS

Part I.
Page
     
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
8
     
 
9
     
Item 2.
30
     
Item 3.
49
     
Item 4.
50
     
Part II.
 
     
Item 1.
50
     
Item 1A.
50
     
Item 2.
50
     
Item 3.
51
     
Item 4.
51
     
Item 5.
51
     
Item 6.
52
2

Table of Contents



Part I.
Financial Information
Item 1.
Financial Statements

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
(In Thousands, Except Share Data)

 
June 30,
   
December 31,
 
   
2019
   
2018
 
Assets:
           
Cash and cash equivalents
 
$
874,836
   
$
211,834
 
Available-for-sale investment securities (cost of $2,322,697 and $2,952,278, respectively)
   
2,359,038
     
2,936,049
 
Equity and other securities (cost of $42,285 and $44,678, respectively)
   
43,234
     
45,609
 
Loans held for sale, at fair value
   
0
     
83
 
                 
Loans
   
6,284,070
     
6,281,121
 
Allowance for loan losses
   
(49,310
)
   
(49,284
)
Net loans
   
6,234,760
     
6,231,837
 
                 
Goodwill, net
   
733,503
     
733,503
 
Core deposit intangibles, net
   
15,738
     
18,596
 
Other intangibles, net
   
51,274
     
55,250
 
Intangible assets, net
   
800,515
     
807,349
 
                 
Premises and equipment, net
   
154,592
     
119,988
 
Accrued interest and fees receivable
   
29,202
     
31,048
 
Other assets
   
249,211
     
223,498
 
                 
Total assets
 
$
10,745,388
   
$
10,607,295
 
                 
Liabilities:
               
Noninterest-bearing deposits
 
$
2,363,408
   
$
2,312,816
 
Interest-bearing deposits
   
6,124,797
     
6,009,555
 
Total deposits
   
8,488,205
     
8,322,371
 
                 
Short-term borrowings
   
0
     
54,400
 
Securities sold under agreement to repurchase, short-term
   
142,359
     
259,367
 
Other long-term debt
   
1,931
     
1,976
 
Subordinated debt held by unconsolidated subsidiary trusts
   
97,939
     
97,939
 
Accrued interest and other liabilities
   
205,444
     
157,459
 
Total liabilities
   
8,935,878
     
8,893,512
 
                 
Commitments and contingencies (See Note K)
               
                 
Shareholders' equity:
               
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued
   
0
     
0
 
Common stock, $1.00 par value, 75,000,000 shares authorized; 51,805,424 and 51,576,839 shares issued, respectively
   
51,806
     
51,577
 
Additional paid-in capital
   
917,855
     
911,748
 
Retained earnings
   
843,288
     
795,563
 
Accumulated other comprehensive loss
   
(4,621
)
   
(45,305
)
Treasury stock, at cost (234,816 shares, including 177,333 shares held by deferred compensation arrangements at June 30, 2019 and 319,015 shares including 207,403 shares held by deferred compensation arrangements at December 31, 2018, respectively)
   
(8,797
)
   
(11,528
)
Deferred compensation arrangements (177,333 and 207,403 shares, respectively)
   
9,979
     
11,728
 
Total shareholders' equity
   
1,809,510
     
1,713,783
 
                 
Total liabilities and shareholders' equity
 
$
10,745,388
   
$
10,607,295
 

The accompanying notes are an integral part of the consolidated financial statements.
3

Table of Contents


COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In Thousands, Except Per-Share Data)

 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest income:
                       
Interest and fees on loans
 
$
74,067
   
$
71,152
   
$
147,770
   
$
140,593
 
Interest and dividends on taxable investments
   
17,427
     
16,517
     
33,514
     
32,041
 
Interest on nontaxable investments
   
2,858
     
3,336
     
5,749
     
6,775
 
Total interest income
   
94,352
     
91,005
     
187,033
     
179,409
 
                                 
Interest expense:
                               
Interest on deposits
   
4,560
     
2,381
     
8,667
     
4,513
 
Interest on borrowings
   
429
     
446
     
1,050
     
926
 
Interest on subordinated debt held by unconsolidated subsidiary trusts
   
1,063
     
1,332
     
2,157
     
2,500
 
Total interest expense
   
6,052
     
4,159
     
11,874
     
7,939
 
                                 
Net interest income
   
88,300
     
86,846
     
175,159
     
171,470
 
Provision for loan losses
   
1,400
     
2,448
     
3,822
     
6,127
 
Net interest income after provision for loan losses
   
86,900
     
84,398
     
171,337
     
165,343
 
                                 
Noninterest revenues:
                               
Deposit service fees
   
15,996
     
18,964
     
31,860
     
38,141
 
Other banking revenues
   
1,147
     
1,163
     
2,683
     
2,406
 
Employee benefit services
   
23,787
     
22,542
     
47,841
     
45,548
 
Insurance services
   
8,329
     
7,415
     
16,191
     
14,774
 
Wealth management services
   
6,578
     
6,496
     
12,927
     
13,202
 
Gain on sale of investment securities, net
   
4,882
     
0
     
4,882
     
0
 
Unrealized (loss) gain on equity securities
   
(13
)
   
(21
)
   
18
     
(21
)
Total noninterest revenues
   
60,706
     
56,559
     
116,402
     
114,050
 
                                 
Noninterest expenses:
                               
Salaries and employee benefits
   
54,008
     
52,402
     
107,387
     
104,261
 
Occupancy and equipment
   
9,619
     
9,437
     
19,907
     
19,968
 
Data processing and communications
   
10,401
     
10,212
     
19,800
     
18,954
 
Amortization of intangible assets
   
3,904
     
4,555
     
8,034
     
9,353
 
Legal and professional fees
   
2,684
     
2,745
     
5,404
     
5,525
 
Business development and marketing
   
3,140
     
2,654
     
5,928
     
4,714
 
Acquisition expenses
   
1,194
     
71
     
1,728
     
63
 
Other expenses
   
6,226
     
4,036
     
11,640
     
9,605
 
Total noninterest expenses
   
91,176
     
86,112
     
179,828
     
172,443
 
                                 
Income before income taxes
   
56,430
     
54,845
     
107,911
     
106,950
 
Income taxes
   
11,415
     
10,239
     
20,950
     
22,238
 
Net income
 
$
45,015
   
$
44,606
   
$
86,961
   
$
84,712
 
                                 
Basic earnings per share
 
$
0.87
   
$
0.87
   
$
1.68
   
$
1.65
 
Diluted earnings per share
 
$
0.86
   
$
0.86
   
$
1.66
   
$
1.63
 

The accompanying notes are an integral part of the consolidated financial statements.


4

Table of Contents
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands)

 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Pension and other post retirement obligations:
                       
Amortization of actuarial losses included in net periodic pension cost, gross
 
$
652
   
$
303
   
$
1,303
   
$
606
 
Tax effect
   
(160
)
   
(74
)
   
(319
)
   
(147
)
Amortization of actuarial losses included in net periodic pension cost, net
   
492
     
229
     
984
     
459
 
Amortization of prior service cost included in net periodic pension cost, gross
   
(29
)
   
(127
)
   
(58
)
   
(254
)
Tax effect
   
8
     
31
     
15
     
62
 
Amortization of prior service cost included in net periodic pension cost, net
   
(21
)
   
(96
)
   
(43
)
   
(192
)
Other comprehensive income related to pension and other post-retirement obligations, net of taxes
   
471
     
133
     
941
     
267
 
                                 
Unrealized gains (losses) on available-for-sale securities:
                               
Net unrealized holding gains (losses) arising during period, gross
   
33,547
     
(14,816
)
   
57,452
     
(56,632
)
Tax effect
   
(8,189
)
   
3,625
     
(14,021
)
   
13,781
 
Net unrealized holding gains (losses) arising during period, net
   
25,358
     
(11,191
)
   
43,431
     
(42,851
)
Reclassification adjustment for net gains included in net income, gross
   
(4,882
)
   
0
     
(4,882
)
   
0
 
Tax effect
   
1,194
     
0
     
1,194
     
0
 
Reclassification adjustment for net gains included in net income, net
   
(3,688
)
   
0
     
(3,688
)
   
0
 
Reclassification of other comprehensive income due to change in accounting principle – equity securities
   
0
     
(208
)
   
0
     
(208
)
Other comprehensive income/(loss) related to unrealized gains (losses) on available-for-sale securities, net of taxes
   
21,670
     
(11,399
)
   
39,743
     
(43,059
)
Other comprehensive income (loss), net of tax
   
22,141
     
(11,266
)
   
40,684
     
(42,792
)
Net income
   
45,015
     
44,606
     
86,961
     
84,712
 
Comprehensive income
 
$
67,156
   
$
33,340
   
$
127,645
   
$
41,920
 

 
As of
 
   
June 30,
2019
   
December 31,
2018
 
Accumulated Other Comprehensive Income By Component:
           
             
Unrealized (loss) for pension and other post-retirement obligations
 
$
(42,252
)
 
$
(43,497
)
Tax effect
   
10,356
     
10,660
 
Net unrealized (loss) for pension and other post-retirement obligations
   
(31,896
)
   
(32,837
)
                 
Unrealized gain (loss) on available-for-sale securities
   
36,341
     
(16,229
)
Tax effect
   
(9,066
)
   
3,969
 
Reclassification of other comprehensive income due to change in accounting principle – equity securities
   
0
     
(208
)
Net unrealized gain (loss) on available-for-sale securities
   
27,275
     
(12,468
)
                 
Accumulated other comprehensive (loss)
 
$
(4,621
)
 
$
(45,305
)

The accompanying notes are an integral part of the consolidated financial statements.
5

Table of Contents


COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Three months ended June 30, 2019 and 2018
(In Thousands, Except Share Data)

                                         
   
Common
Stock
   
Additional
         
Accumulated
Other
         
Deferred
       
   
Shares
   
Amount
   
Paid-In
   
Retained
   
Comprehensive
   
Treasury
   
Compensation
       
   
Outstanding
   
Issued
   
Capital
   
Earnings
   
(Loss)
   
Stock
   
Arrangements
   
Total
 
                                                 
Balance at March 31, 2019
   
51,471,371
   
$
51,728
   
$
913,917
   
$
817,933
   
$
(26,762
)
 
$
(9,601
)
 
$
9,913
   
$
1,757,128
 
                                                                 
Net income
                           
45,015
                             
45,015
 
                                                                 
Other comprehensive income, net of tax
                                   
22,141
                     
22,141
 
                                                                 
Cash dividends declared:
                                                               
Common, $0.38 per share
                           
(19,660
)
                           
(19,660
)
                                                                 
Common stock activity under employee stock ownership plan
   
77,666
     
78
     
1,987
                                     
2,065
 
                                                                 
Stock-based compensation
                   
1,366
                                     
1,366
 
                                                                 
Treasury stock issued to benefit plans, net
   
21,571
             
585
                     
804
     
66
     
1,455
 
                                                                 
Balance at June 30, 2019
   
51,570,608
   
$
51,806
   
$
917,855
   
$
843,288
   
$
(4,621
)
 
$
(8,797
)
 
$
9,979
   
$
1,809,510
 
                                                                 
Balance at March 31, 2018
   
50,883,603
   
$
51,374
   
$
898,036
   
$
723,404
   
$
(35,226
)
 
$
(17,633
)
 
$
11,511
   
$
1,631,466
 
                                                                 
Net income
                           
44,606
                             
44,606
 
                                                                 
Other comprehensive loss, net of tax
                                   
(11,057
)
                   
(11,057
)
                                                                 
Cumulative effect of change in accounting principle - equity securities
                           
208
     
(208
)
                   
0
 
                                                                 
Cash dividends declared:
                                                               
Common, $0.34 per share
                           
(17,439
)
                           
(17,439
)
                                                                 
Common stock activity under employee stock ownership plan
   
137,738
     
138
     
3,936
                                     
4,074
 
                                                                 
Stock-based compensation
                   
1,681
                                     
1,681
 
                                                                 
Treasury stock issued to benefit plans, net
   
64,533
             
1,260
                     
2,299
     
69
     
3,628
 
                                                                 
Balance at June 30, 2018
   
51,085,874
   
$
51,512
   
$
904,913
   
$
750,779
   
$
(46,491
)
 
$
(15,334
)
 
$
11,580
   
$
1,656,959
 

The accompanying notes are an integral part of the consolidated financial statements.


6

Table of Contents
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Six months ended June 30, 2019 and 2018
(In Thousands, Except Share Data)

                                           
 
Common
Stock
   
Additional
         
Accumulated
Other
         
Deferred
       
   
Shares
   
Amount
   
Paid-In
   
Retained
   
Comprehensive
   
Treasury
   
Compensation
       
   
Outstanding
   
Issued
   
Capital
   
Earnings
   
(Loss)
   
Stock
   
Arrangements
   
Total
 
                                                 
Balance at December 31, 2018
   
51,257,824
   
$
51,577
   
$
911,748
   
$
795,563
   
$
(45,305
)
 
$
(11,528
)
 
$
11,728
   
$
1,713,783
 
                                                                 
Net income
                           
86,961
                             
86,961
 
                                                                 
Other comprehensive income, net of tax
                                   
40,684
                     
40,684