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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 June 30, 2020

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. 53,529,607 shares of Common Stock, $1.00 par value per share, were outstanding on July 31, 2020.





Table of Contents
TABLE OF CONTENTS

Part I.
Page
 
   
Item 1.
 
 
   
 
3
 
   
 
4
     
 
5
     
 
6
     
 
8
     
 
9
     
Item 2.
37
 
   
Item 3.
60
 
   
Item 4.
62
 
   
Part II.
 
 
   
Item 1.
62
 
 
 
Item 1A.
62
 
   
Item 2.
64
 
   
Item 3.
64
 
   
Item 4.
64
 
 
 
Item 5.
64
 
   
Item 6.
65


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, 2020
   
December 31, 2019
 
Assets:
           
Cash and cash equivalents
 
$
1,319,880
   
$
205,030
 
Available-for-sale investment securities (cost of $3,129,978 and $3,011,551, respectively)
   
3,293,116
     
3,044,428
 
Equity and other securities (cost of $43,411 and $42,965, respectively)
   
44,343
     
43,915
 
Loans held for sale, at fair value
   
5,517
     
0
 
                 
Loans
   
7,528,039
     
6,890,543
 
Allowance for credit losses
   
(64,437
)
   
(49,911
)
Net loans
   
7,463,602
     
6,840,632
 
                 
Goodwill, net
   
792,715
     
773,810
 
Core deposit intangibles, net
   
16,565
     
16,418
 
Other intangibles, net
   
43,481
     
46,695
 
Intangible assets, net
   
852,761
     
836,923
 
                 
Premises and equipment, net
   
167,301
     
164,638
 
Accrued interest and fees receivable
   
38,553
     
31,647
 
Other assets
   
259,144
     
243,082
 
                 
Total assets
 
$
13,444,217
   
$
11,410,295
 
                 
Liabilities:
               
Noninterest-bearing deposits
 
$
3,273,921
   
$
2,465,902
 
Interest-bearing deposits
   
7,572,752
     
6,529,065
 
Total deposits
   
10,846,673
     
8,994,967
 
                 
Overnight Federal Home Loan Bank borrowings
   
0
     
8,300
 
Securities sold under agreement to repurchase, short-term
   
168,491
     
241,708
 
Other Federal Home Loan Bank borrowings
   
7,704
     
3,750
 
Subordinated notes payable
   
13,755
     
13,795
 
Subordinated debt held by unconsolidated subsidiary trusts
   
79,382
     
77,320
 
Accrued interest and other liabilities
   
246,897
     
215,221
 
Total liabilities
   
11,362,902
     
9,555,061
 
                 
Commitments and contingencies (See Note J)
   
     
 
                 
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; 53,673,335 and 51,974,726 shares issued, respectively
   
53,672
     
51,975
 
Additional paid-in capital
   
1,019,291
     
927,337
 
Retained earnings
   
915,392
     
882,851
 
Accumulated other comprehensive gain (loss)
   
90,031
     
(10,226
)
Treasury stock, at cost (159,119 shares, including 157,897 shares held by deferred compensation arrangements at June 30, 2020 and 180,803 shares including 179,548 shares held by deferred compensation arrangements at December 31, 2019, respectively)
   
(6,066
)
   
(6,823
)
Deferred compensation arrangements (157,897 and 179,548 shares, respectively)
   
8,995
     
10,120
 
Total shareholders’ equity
   
2,081,315
     
1,855,234
 
                 
Total liabilities and shareholders’ equity
 
$
13,444,217
   
$
11,410,295
 

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
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Interest income:
                       
Interest and fees on loans
 
$
78,720
   
$
74,067
   
$
157,285
   
$
147,770
 
Interest and dividends on taxable investments
   
15,423
     
17,427
     
30,752
     
33,514
 
Interest and dividends on nontaxable investments
   
3,049
     
2,858
     
6,150
     
5,749
 
Total interest income
   
97,192
     
94,352
     
194,187
     
187,033
 
                                 
Interest expense:
                               
Interest on deposits
   
4,173
     
4,560
     
9,718
     
8,667
 
Interest on borrowings
   
430
     
429
     
988
     
1,050
 
Interest on subordinated notes payable
   
184
     
0
     
369
     
0
 
Interest on subordinated debt held by unconsolidated subsidiary trusts
   
454
     
1,063
     
1,107
     
2,157
 
Total interest expense
   
5,241
     
6,052
     
12,182
     
11,874
 
                                 
Net interest income
   
91,951
     
88,300
     
182,005
     
175,159
 
Provision for credit losses
   
9,774
     
1,400
     
15,368
     
3,822
 
Net interest income after provision for credit losses
   
82,177
     
86,900
     
166,637
     
171,337
 
                                 
Noninterest revenues:
                               
Deposit service fees
   
12,179
     
15,996
     
28,462
     
31,860
 
Mortgage banking
   
1,375
     
213
     
2,291
     
414
 
Other banking services
   
755
     
934
     
1,650
     
2,269
 
Employee benefit services
   
24,068
     
23,787
     
49,434
     
47,841
 
Insurance services
   
8,183
     
8,329
     
16,241
     
16,191
 
Wealth management services
   
6,366
     
6,578
     
13,500
     
12,927
 
Gain on sale of investment securities, net
   
0
     
4,882
     
0
     
4,882
 
Unrealized gain (loss) on equity securities
   
12
     
(13
)
   
(18
)
   
18
 
Total noninterest revenues
   
52,938
     
60,706
     
111,560
     
116,402
 
                                 
Noninterest expenses:
                               
Salaries and employee benefits
   
54,721
     
54,008
     
112,972
     
107,387
 
Occupancy and equipment
   
9,754
     
9,619
     
20,493
     
19,907
 
Data processing and communications
   
10,833
     
10,401
     
21,246
     
19,800
 
Amortization of intangible assets
   
3,524
     
3,904
     
7,191
     
8,034
 
Legal and professional fees
   
3,061
     
2,684
     
6,212
     
5,404
 
Business development and marketing
   
1,504
     
3,140
     
4,017
     
5,928
 
Acquisition expenses
   
3,372
     
1,194
     
3,741
     
1,728
 
Other expenses
   
4,134
     
6,226
     
8,694
     
11,640
 
Total noninterest expenses
   
90,903
     
91,176
     
184,566
     
179,828
 
                                 
Income before income taxes
   
44,212
     
56,430
     
93,631
     
107,911
 
Income taxes
   
8,964
     
11,415
     
18,249
     
20,950
 
Net income
 
$
35,248
   
$
45,015
   
$
75,382
   
$
86,961
 
                                 
Basic earnings per share
 
$
0.67
   
$
0.87
   
$
1.44
   
$
1.68
 
Diluted earnings per share
 
$
0.66
   
$
0.86
   
$
1.43
   
$
1.66
 

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
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Pension and other post retirement obligations:
                       
Amortization of actuarial losses included in net periodic pension cost, gross
 
$
820
   
$
652
   
$
1,640
   
$
1,303
 
Tax effect
   
(197
)
   
(160
)
   
(394
)
   
(319
)
Amortization of actuarial losses included in net periodic pension cost, net
   
623
     
492
     
1,246
     
984
 
Amortization of prior service cost included in net periodic pension cost, gross
   
16
     
(29
)
   
31
     
(58
)
Tax effect
   
(4
)
   
8
     
(7
)
   
15
 
Amortization of prior service cost included in net periodic pension cost, net
   
12
     
(21
)
   
24
     
(43
)
Other comprehensive income related to pension and other post-retirement obligations, net of taxes
   
635
     
471
     
1,270
     
941
 
                                 
Unrealized gains on available-for-sale securities:
                               
Net unrealized holding gains arising during period, gross
   
7,832
     
33,547
     
130,260
     
57,452
 
Tax effect
   
(1,880
)
   
(8,189
)
   
(31,273
)
   
(14,021
)
Net unrealized holding gains arising during period, net
   
5,952
     
25,358
     
98,987
     
43,431
 
Reclassification adjustment for net gains included in net income, gross
   
0
     
(4,882
)
   
0
     
(4,882
)
Tax effect
   
0
     
1,194
     
0
     
1,194
 
Reclassification adjustment for net gains included in net income, net
   
0
     
(3,688
)
   
0
     
(3,688
)
Other comprehensive income related to unrealized gains on available-for-sale securities, net of taxes
   
5,952
     
21,670
     
98,987
     
39,743
 
Other comprehensive income, net of tax
   
6,587
     
22,141
     
100,257
     
40,684
 
Net income
   
35,248
     
45,015
     
75,382
     
86,961
 
Comprehensive income
 
$
41,835
   
$
67,156
   
$
175,639
   
$
127,645
 

 
As of
 
   
June 30,
2020
   
December 31,
2019
 
Accumulated Other Comprehensive Income By Component:
           
             
Unrealized (loss) for pension and other post-retirement obligations
 
$
(44,504
)
 
$
(46,175
)
Tax effect
   
10,892
     
11,293
 
Net unrealized (loss) for pension and other post-retirement obligations
   
(33,612
)
   
(34,882
)
                 
Unrealized gain on available-for-sale securities
   
163,137
     
32,877
 
Tax effect
   
(39,494
)
   
(8,221
)
Net unrealized gain on available-for-sale securities
   
123,643
     
24,656
 
                 
Accumulated other comprehensive income (loss)
 
$
90,031
   
$
(10,226
)

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, 2020 and 2019
(In Thousands, Except Share Data)

 
Common Stock
   
Additional
         
Accumulated
Other
         
Deferred
       
   
Shares
Outstanding
   
Amount
Issued
   
Paid-In
Capital
   
Retained
Earnings
   
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Compensation
Arrangements
   
Total
 
                                                 
Balance at March 31, 2020
   
52,031,092
   
$
52,190
   
$
935,924
   
$
902,148
   
$
83,444
   
$
(6,005
)
 
$
8,930
   
$
1,976,631
 
                                                                 
Net income
                           
35,248
                             
35,248
 
                                                                 
Other comprehensive income, net of tax
                                   
6,587
                     
6,587
 
                                                                 
Cash dividends declared:
                                                               
Common, $0.41 per share
                           
(22,004
)
                           
(22,004
)
                                                                 
Common stock activity under employee stock ownership plan
   
118,968
     
119
     
6,505
                                     
6,624
 
                                                                 
Stock-based compensation
                   
1,281
                                     
1,281
 
                                                                 
Stock issued for acquisition
   
1,363,259
     
1,363
     
75,579
                                     
76,942
 
                                                                 
Treasury stock issued to benefit plans, net
   
897
             
2
                     
(61
)
   
65
     
6
 
                                                                 
Balance at June 30, 2020
   
53,514,216
   
$
53,672
   
$
1,019,291
   
$
915,392
   
$
90,031
   
$
(6,066
)
 
$
8,995
   
$
2,081,315
 
                                                                 
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
 

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, 2020 and 2019
(In Thousands, Except Share Data)

 
Common Stock
   
Additional
         
Accumulated
Other
         
Deferred
       
   
Shares
Outstanding
   
Amount
Issued
   
Paid-In
Capital
   
Retained
Earnings
   
Comprehensive
(Loss) Income
   
Treasury
Stock
   
Compensation
Arrangements
   
Total
 
                                                 
Balance at December 31, 2019
   
51,793,923
   
$
51,975
   
$
927,337
   
$
882,851
   
$
(10,226
)
 
$
(6,823
)
 
$
10,120
   
$
1,855,234
 
                                                                 
Net income
                           
75,382
                             
75,382
 
                                                                 
Other comprehensive income, net of tax
                                   
100,257
                     
100,257
 
                                                                 
Cumulative effect of change in accounting  Principle - Current Expected Credit Losses
                           
530
                             
530
 
                                                                 
Cash dividends declared:
                                                               
Common, $0.82 per share
                           
(43,371
)
                           
(43,371
)