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Section 1: 10-Q (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 September 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. 51,701,790 shares of Common Stock, $1.00 par value per share, were outstanding on October 31, 2019.




Table of Contents
TABLE OF CONTENTS

Part I.
Page
     
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
8
     
 
9
     
Item 2.
31
     
Item 3.
51
     
Item 4.
52
     
Part II.
 
     
Item 1.
52
     
Item 1A.
52
     
Item 2.
52
     
Item 3.
53
     
Item 4.
53
     
Item 5.
53
     
Item 6.
54
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)

 
September 30,
2019
   
December 31,
2018
 
Assets:
           
Cash and cash equivalents
 
$
1,014,042
   
$
211,834
 
Available-for-sale investment securities (cost of $2,392,004 and $2,952,278, respectively)
   
2,437,102
     
2,936,049
 
Equity and other securities (cost of $43,680 and $44,678, respectively)
   
44,640
     
45,609
 
Loans held for sale, at fair value
   
0
     
83
 
                 
Loans
   
6,853,191
     
6,281,121
 
Allowance for loan losses
   
(49,423
)
   
(49,284
)
Net loans
   
6,803,768
     
6,231,837
 
                 
Goodwill, net
   
773,610
     
733,503
 
Core deposit intangibles, net
   
17,872
     
18,596
 
Other intangibles, net
   
49,203
     
55,250
 
Intangible assets, net
   
840,685
     
807,349
 
                 
Premises and equipment, net
   
169,933
     
119,988
 
Accrued interest and fees receivable
   
34,126
     
31,048
 
Other assets
   
253,001
     
223,498
 
                 
Total assets
 
$
11,597,297
   
$
10,607,295
 
                 
Liabilities:
               
Noninterest-bearing deposits
 
$
2,549,395
   
$
2,312,816
 
Interest-bearing deposits
   
6,618,890
     
6,009,555
 
Total deposits
   
9,168,285
     
8,322,371
 
                 
Short-term borrowings
   
0
     
54,400
 
Securities sold under agreement to repurchase, short-term
   
233,333
     
259,367
 
Other long-term debt
   
4,328
     
1,976
 
Subordinated notes payable
   
13,814
     
0
 
Subordinated debt held by unconsolidated subsidiary trusts
   
77,320
     
97,939
 
Accrued interest and other liabilities
   
259,796
     
157,459
 
Total liabilities
   
9,756,876
     
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; 51,842,966 and 51,576,839 shares issued, respectively
   
51,843
     
51,577
 
Additional paid-in capital
   
921,682
     
911,748
 
Retained earnings
   
861,254
     
795,563
 
Accumulated other comprehensive income (loss)
   
2,470
     
(45,305
)
Treasury stock, at cost (182,912 shares, including 178,361 shares held by deferred compensation arrangements at September 30, 2019 and 319,015 shares including 207,403 shares held by deferred compensation arrangements at December 31, 2018, respectively)
   
(6,875
)
   
(11,528
)
Deferred compensation arrangements (178,361 and 207,403 shares, respectively)
   
10,047
     
11,728
 
Total shareholders' equity
   
1,840,421
     
1,713,783
 
                 
Total liabilities and shareholders' equity
 
$
11,597,297
   
$
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
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest income:
                       
Interest and fees on loans
 
$
79,931
   
$
72,256
   
$
227,701
   
$
212,849
 
Interest and dividends on taxable investments
   
15,862
     
15,421
     
49,376
     
47,462
 
Interest on nontaxable investments
   
2,854
     
3,226
     
8,603
     
10,001
 
Total interest income
   
98,647
     
90,903
     
285,680
     
270,312
 
                                 
Interest expense:
                               
Interest on deposits
   
5,859
     
2,764
     
14,526
     
7,277
 
Interest on borrowings
   
347
     
796
     
1,397
     
1,722
 
Interest on subordinated notes payable
   
161
     
0
     
161
     
0
 
Interest on subordinated debt held by unconsolidated subsidiary trusts
   
1,004
     
1,145
     
3,161
     
3,645
 
Total interest expense
   
7,371
     
4,705
     
19,245
     
12,644
 
                                 
Net interest income
   
91,276
     
86,198
     
266,435
     
257,668
 
Provision for loan losses
   
1,751
     
2,215
     
5,573
     
8,342
 
Net interest income after provision for loan losses
   
89,525
     
83,983
     
260,862
     
249,326
 
                                 
Noninterest revenues:
                               
Deposit service fees
   
16,920
     
16,127
     
48,780
     
54,268
 
Other banking revenues
   
945
     
1,536
     
3,628
     
3,942
 
Employee benefit services
   
24,329
     
23,265
     
72,170
     
68,813
 
Insurance services
   
8,527
     
8,270
     
24,718
     
23,044
 
Wealth management services
   
6,363
     
6,168
     
19,290
     
19,370
 
Gain on sales of investment securities, net
   
0
     
0
     
4,882
     
0
 
Unrealized gain on equity securities
   
10
     
743
     
28
     
722
 
Loss on debt extinguishment
   
0
     
(318
)
   
0
     
(318
)
Total noninterest revenues
   
57,094
     
55,791
     
173,496
     
169,841
 
                                 
Noninterest expenses:
                               
Salaries and employee benefits
   
56,061
     
51,062
     
163,448
     
155,323
 
Occupancy and equipment
   
9,801
     
9,770
     
29,708
     
29,738
 
Data processing and communications
   
10,675
     
10,509
     
30,475
     
29,463
 
Amortization of intangible assets
   
3,960
     
4,427
     
11,994
     
13,780
 
Legal and professional fees
   
2,595
     
2,522
     
7,999
     
8,047
 
Business development and marketing
   
2,604
     
2,587
     
8,532
     
7,301
 
Acquisition expenses
   
6,061
     
(832
)
   
7,789
     
(769
)
Other expenses
   
5,172
     
5,188
     
16,812
     
14,793
 
Total noninterest expenses
   
96,929
     
85,233
     
276,757
     
257,676
 
                                 
Income before income taxes
   
49,690
     
54,541
     
157,601
     
161,491
 
Income taxes
   
10,472
     
11,435
     
31,422
     
33,673
 
Net income
 
$
39,218
   
$
43,106
   
$
126,179
   
$
127,818
 
                                 
Basic earnings per share
 
$
0.76
   
$
0.84
   
$
2.44
   
$
2.49
 
Diluted earnings per share
 
$
0.75
   
$
0.83
   
$
2.41
   
$
2.46
 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Pension and other post retirement obligations:
                       
Amortization of actuarial losses included in net periodic pension cost, gross
 
$
651
   
$
304
   
$
1,954
   
$
910
 
Tax effect
   
(158
)
   
(74
)
   
(477
)
   
(221
)
Amortization of actuarial losses included in net periodic pension cost, net
   
493
     
230
   
$
1,477
     
689
 
Amortization of prior service cost included in net periodic pension cost, gross
   
(28
)
   
(105
)
   
(86
)
   
(359
)
Tax effect
   
6
     
25
     
21
     
87
 
Amortization of prior service cost included in net periodic pension cost, net
   
(22
)
   
(80
)
   
(65
)
   
(272
)
Initial projected benefit obligation recognized upon plan adoption, gross
   
0
     
(775
)
   
0
     
(775
)
Tax effect
   
0
     
189
     
0
     
189
 
Initial projected benefit obligation recognized upon plan adoption, net
   
0
     
(586
)
   
0
     
(586
)
Other comprehensive income (loss) related to pension and other post-retirement obligations, net of taxes
   
471
     
(436
)
   
1,412
     
(169
)
                                 
Unrealized gains (losses) on available-for-sale securities:
                               
Net unrealized holding gains (losses) arising during period, gross
   
8,756
     
(20,094
)
   
66,208
     
(76,705
)
Tax effect
   
(2,136
)
   
4,879
     
(16,157
)
   
18,639
 
Net unrealized holding gains (losses) arising during period, net
   
6,620
     
(15,215
)
   
50,051
     
(58,066
)
Reclassification adjustment for net gains included in net income, gross
   
0
     
0
     
(4,882
)
   
0
 
Tax effect
   
0
     
0
     
1,194
     
0
 
Reclassification adjustment for net gains included in net income, net
   
0
     
0
     
(3,688
)
   
0
 
Reclassification of other comprehensive income due to change in accounting principle – equity securities
   
0
     
0
     
0
     
(208
)
Other comprehensive income/(loss) related to unrealized gains (losses) on available-for-sale securities, net of taxes
   
6,620
     
(15,215
)
   
46,363
     
(58,274
)
Other comprehensive income (loss), net of tax
   
7,091
     
(15,651
)
   
47,775
     
(58,443
)
Net income
   
39,218
     
43,106
     
126,179
     
127,818
 
Comprehensive income
 
$
46,309
   
$
27,455
   
$
173,954
   
$
69,375
 

 
As of
 
   
September 30,
2019
   
December 31,
2018
 
Accumulated Other Comprehensive Income (Loss) By Component:
           
             
Unrealized (loss) for pension and other post-retirement obligations
 
$
(41,629
)
 
$
(43,497
)
Tax effect
   
10,204
     
10,660
 
Net unrealized (loss) for pension and other post-retirement obligations
   
(31,425
)
   
(32,837
)
                 
Unrealized gain (loss) on available-for-sale securities
   
45,097
     
(16,229
)
Tax effect
   
(10,994
)
   
3,969
 
Reclassification of other comprehensive income due to change in accounting principle – equity securities
   
(208
)
   
(208
)
Net unrealized gain (loss) on available-for-sale securities
   
33,895
     
(12,468
)
                 
Accumulated other comprehensive income (loss)
 
$
2,470
   
$
(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 September 30, 2019 and 2018
(In Thousands, Except Share Data)

 
Common Stock
   
Additional
         
Accumulated
Other
         
Deferred
       
   
Shares
Outstanding
   
Amount
Issued
   
Paid-In
Capital
   
Retained
Earnings
   
Comprehensive
(Loss)
   
Treasury
Stock
   
Compensation
Arrangements
   
Total
 
                                                 
Balance at June 30, 2019
   
51,570,608
   
$
51,806
   
$
917,855
   
$
843,288
   
$
(4,621
)
 
$
(8,797
)
 
$
9,979
   
$
1,809,510
 
                                                                 
Net income
                           
39,218
                             
39,218
 
                                                                 
Other comprehensive income, net of tax
                                   
7,091
                     
7,091
 
                                                                 
Cash dividends declared:
                                                               
Common, $0.41 per share
                           
(21,252
)
                           
(21,252
)
                                                                 
Common stock activity under employee stock ownership plan
   
37,542
     
37
     
1,254
                                     
1,291
 
                                                                 
Stock-based compensation
                   
1,241
                                     
1,241
 
                                                                 
Treasury stock issued to benefit plans, net
   
51,904
             
1,332
                     
1,922
     
68
     
3,322
 
                                                                 
Balance at September 30, 2019
   
51,660,054
   
$
51,843
   
$
921,682
   
$
861,254
   
$
2,470
   
$
(6,875
)
 
$
10,047
   
$
1,840,421
 
                                                                 
Balance at June 30, 2018
   
51,085,874
   
$
51,512
   
$
904,913
   
$
750,779
   
$
(46,491
)
 
$
(15,334
)
 
$
11,580
   
$
1,656,959
 
                                                                 
Net income
                           
43,106
                             
43,106
 
                                                                 
Other comprehensive loss, net of tax
                                   
(15,651
)
                   
(15,651
)
                                                                 
Cash dividends declared:
                                                               
Common, $0.38 per share
                           
(19,482
)
                           
(19,482
)
                                                                 
Common stock activity under employee stock ownership plan
   
35,261
     
35
     
1,115
                                     
1,150
 
                                                                 
Stock-based compensation
                   
1,211
                                     
1,211
 
                                                                 
Treasury stock issued to benefit plans, net
   
15,541
             
451
                     
531
     
70
     
1,052
 
                                                                 
Balance at September 30, 2018
   
51,136,676
   
$
51,547
   
$
907,690
   
$
774,403
   
$
(62,142
)
 
$
(14,803
)
 
$
11,650
   
$
1,668,345
 

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)
Nine months ended September 30, 2019 and 2018
(In Thousands, Except Share Data)

 
Common Stock
   
Additional
         
Accumulated
Other
         
Deferred
       
   
Shares
Outstanding
   
Amount
Issued
   
Paid-In
Capital
   
Retained
Earnings
   
Comprehensive
(Loss)
   
Treasury
Stock
   
Compensation
Arrangements
   
Total
 
                                                 
Balance at December 31, 2018
   
51,257,824
   
$
51,577
   
$
911,748
   
$
795,563
   
$
(45,305
)
 
$
(