Community Bank System Reports Solid Fourth Quarter and Full Year Operating Results

  Community Bank System Reports Solid Fourth Quarter and Full Year Operating
  Results

- Increased cash dividend for the 20^th consecutive year

- Organic loan growth of 7% in 2012

- Acquisition of 19 Upstate NY branches completed during the third quarter

Business Wire

SYRACUSE, N.Y. -- January 22, 2013

Community Bank System, Inc. (NYSE: CBU) reported fourth quarter 2012 net
income of $18.8 million, or $0.47 per share, compared with $19.0 million, or
$0.51 per share reported for the fourth quarter of 2011. Current quarter
results included $0.5 million of acquisition-related expenses and a $2.5
million litigation settlement charge, or $0.05 per share. The Company reported
full year earnings of $77.1 million in 2012, an increase of 5.4% over the year
ended December 31, 2011.

“Our fourth quarter and full year operating performance continued to be at
very favorable levels and was characterized by solid revenue growth, strong
organic loan generation, a continuation of our stable and favorable asset
quality profile, and the successful completion of the branch acquisitions
announced earlier in the year,” said President and Chief Executive Officer
Mark E. Tryniski. “We continue to focus on building additional value into our
enterprise through selective acquisitions, disciplined lending and a
consistent approach to business regardless of economic conditions. In
September, we increased our quarterly dividend to $0.27 per share, or 3.8%
higher, marking the twentieth consecutive year of dividend increases for the
Company. We believe that this demonstrates the Company’s commitment to the
payment of a meaningful and growing dividend as an important component of
providing consistent and favorable long-term returns to our shareholders.”

Total revenue for the fourth quarter of 2012 was $86.2 million, an increase of
$8.7 million, or 11.2%, compared to the prior year fourth quarter. Net
interest income increased 8.8% from the prior year quarter to $60.0 million,
the result of an $897 million increase in average interest-earning assets,
comprised of an additional $536 million of investment securities (including
cash equivalents) and a $361 million increase in average loans, from both
organic and acquired sources. On a linked quarter basis, ending loans grew
$53.1 million, and consistent with the first three quarters of 2012, primarily
in residential mortgage and consumer installment products. Although quarterly
net interest income was up 8.8% over the fourth quarter of 2011, the
completion of the branch acquisitions (and its associated net liquidity
characteristics) in the third quarter of 2012 contributed to a reduction in
the Company’s net interest margin from 4.06% in the fourth quarter of 2011 to
3.83% in the current quarter, as expected. The fourth quarter’s net interest
income included the receipt of the Company’s semi-annual dividend from the
Federal Reserve Bank as well as certain loan-related fees which combined added
approximately four basis points to the quarterly net interest margin. On a
full year basis the Company’s net interest income increased $21.0 million, or
10.0%, in 2012, a product of 15.4% growth in interest-earning assets partially
offset by a 19 basis-point decline in the net interest margin.

Fourth quarter non-interest income increased $3.8 million to $26.2 million,
compared with fourth quarter 2011, reflecting increased benefits
administration and consulting fees, higher deposit services fees, and
increased wealth management revenues. Employee benefits administration and
consulting revenues were up 19.3% compared to fourth quarter 2011, principally
from the December 2011 acquisition of Metro-New York based, CAI Benefits
(CAI). Wealth management fees were up $0.6 million, or 21.8% over fourth
quarter 2011, driven by solid gains in trust services and asset management.
Deposit service fees of $12.6 million were up $1.6 million, or 14.3% from
fourth quarter of 2011, and included the activities of the branches acquired
in the third quarter.

Fourth quarter core operating expenses (excluding acquisition expenses and the
litigation settlement charge) of $53.9 million, increased $6.2 million over
the fourth quarter of 2011, and included the recurring operating expenses of
the acquired branches as well as CAI. Year-to-date core operating expenses
(excluding acquisition expenses and the litigation settlement charge) of
$203.5 million were 9.7% higher than 2011, and reflect the aforementioned
branch and CAI transactions, as well as the acquisition of the Wilber
Corporation in April 2011. The results for the fourth quarter and full-year
2012 included an accrual of $2.5 million with respect to the settlement of a
class action lawsuit, similar to other actions filed against more than 100
other financial institutions in the United States over the last three years.
The litigation settlement related to the processing of retail debit card
transactions and its impact on overdraft fees. The Company had considerable
affirmative defenses to the claims, however, the settlement the Company was
able to achieve was, in its judgment, a superior outcome for shareholders when
measured against the cost and the staff resources required for litigation.

The full year 2012 effective income tax rate of 29.2% was consistent with the
29.4% rate in 2011, reflecting proportionately similar levels of income being
generated from fully taxable and non-taxable sources.

Financial Position

Average earning assets for the fourth quarter were $6.67 billion, an increase
of $39.0 million compared to third quarter of 2012, and up $897.3 million over
the fourth quarter of 2011. Ending loans increased $394.6 million
year-over-year, reflecting strong organic growth from consumer mortgage and
installment products and loans from the acquired branches. Average investment
securities (including cash equivalents) of $2.83 billion for the fourth
quarter were down 3.0% from the third quarter, reflective of contractual cash
flows. Average deposits increased $167.0 million, or 3.1%, compared to the
third quarter of 2012, and were up $835.9 million from the fourth quarter of
2011, principally from the branch transactions. Quarter-end borrowings were
$830.1 million, consistent with both the end of the third quarter of 2012 and
the end of last year.

Year-end shareholders’ equity of $902.8 million was $128.2 million, or 16.6%,
higher than December 31, 2011. The year-over-year increase was driven by the
January 2012 issuance of 2.1 million additional shares in support of the
Company’s branch acquisitions completed in the third quarter, appreciation in
the available-for-sale investment portfolio, and continued solid growth in
retained earnings due to record levels of net income generation. Despite the
completion of the branch acquisitions in the third quarter, the Company
continued to strengthen its capital position as was evidenced by the 50
basis-point increase in the net tangible equity to net tangible assets ratio
from the end of 2011.

Asset Quality

The Company’s asset quality metrics continue to be markedly better than
comparative peer and industry averages and illustrate the long-term
effectiveness of the Company’s disciplined risk management and underwriting
standards. Net charge-offs were $2.6 million for the fourth quarter, compared
to $1.7 million for the third quarter of 2012 and $1.8 million for fourth
quarter of 2011. Nonperforming loans as a percentage of total loans at
December 31, 2012 were 0.75%, down from the 0.81% at September 30, 2012, and
down from 0.90% of total loans at the end of last year. The total delinquency
ratio of 1.92% at the end of the fourth quarter was up 13 basis points from
the end of the third quarter 2012, but 13 basis points lower than the 2.05%
level at December 31, 2011. The fourth quarter provision for loan losses of
$2.7 million was consistent with the third quarter and $1.1 million higher
than the fourth quarter of last year. The allowance for loan losses to
nonperforming loans was 148% at December 31, 2012, compared to 139% at
September 30, 2012, and 135% as of December 31, 2011.

Upstate New York Branch Banking Expansion

The Company completed the acquisition and conversion of 16 HSBC branches (July
20, 2012) and three First Niagara branches (September 7, 2012) in its core
Upstate New York markets in the third quarter. In total, approximately $160
million of loans and $800 million of deposits were acquired in these
transactions.

Increased Cash Dividend/Stock Repurchase Authorization

In September, the Company increased its quarterly cash dividend to
shareholders by 3.8%, to $0.27 per share, marking its twentieth (20^th)
consecutive year of annual increases. The increase earned the Company the
distinction of being one of only 14 companies to become a new member of the
S&P 1500 Dividend Aristocrats Index in 2012, signifying it has raised its
annual regular cash dividend payment for at least 20 consecutive years. Based
upon the closing price for a share of Community Bank System, Inc. common stock
of $28.49 on January 18, 2013, the $0.27 per share quarterly dividend
represents an approximate annual yield of 3.8%.

In December, the Company’s Board of Directors also approved a stock repurchase
program authorizing the repurchase, at the discretion of senior management, of
up to 2.0 million shares of the Company’s common stock during a twelve-month
period starting on January 1, 2013. The new repurchase authorization replaced
an existing program which expired on December 31, 2012.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow
(Wednesday) January 23, 2013 to discuss fourth quarter and full-year results.
The conference call can be accessed at 1-877-551-8082 (1-904-520-5770 if
outside United States and Canada). An audio recording will be available one
hour after the call until March 31, 2013, and may be accessed at
1-888-284-7564 (1-904-596-3174 if outside the United States and Canada) and
entering access code 2972591. Investors may also listen live via the Internet
at: [http://www.videonewswire.com/event.asp?id=91497]. The recording will be
archived until January 23, 2014 and can be accessed at any point during this
time at no cost.

This earnings release, including supporting financial tables, is available
within the press releases section of the Company's investor relations website
at: http://ir.communitybanksystem.com. An archived webcast of the earnings
call will be available on this site for one full year.

Headquartered in DeWitt, N.Y., Community Bank System, Inc. has $7.5 billion in
assets and over 180 customer facilities. The Company’s banking subsidiary,
Community Bank, N.A. operates across Upstate New York and Northeastern
Pennsylvania, where it conducts business as First Liberty Bank & Trust. 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 communities; Community
Investment Services, Inc., a wealth management firm delivering a wide range of
financial products throughout the Company's branch network; and Nottingham
Advisors, an investment management and advisory firm with offices in Buffalo,
N.Y. and North Palm Beach, Florida. For more information, visit:
www.communitybankna.com or www.firstlibertybank.com.

                                                             
Summary of Financial Data
(Dollars in thousands,                                       
expect per share data)
                                 Quarter Ended           Year Ended
                              December 31,          December 31,
Earnings                       2012      2011      2012       2011
Loan income                      $49,405     $50,511     $192,710     $192,981
Investment income                22,545      19,903      88,690       77,988
Total interest income            71,950      70,414      281,400      270,969
Interest expense                 11,981      15,279      50,976       61,556
Net interest income              59,969      55,135      230,424      209,413
Provision for loan losses        2,666       1,593       9,108        4,736
Net interest income after        57,303      53,542      221,316      204,677
provision for loan losses
Deposit service fees             12,603      11,027      46,064       42,334
Mortgage banking revenues        161         37          843          1,735
Other banking services           613         694         3,226        2,916
Wealth management services       3,449       2,831       12,876       10,697
Benefit trust,
administration, consulting       9,397       7,879       35,946       31,601
and actuarial fees
Investment securities and
debt extinguishment              0           (69)        291          (61)
gains/(losses), net
Total noninterest income         26,223      22,399      99,246       89,222
Salaries and employee            29,639      27,093      112,034      102,278
benefits
Occupancy and equipment and      6,665       6,089       25,799       24,502
furniture
Amortization of intangible       1,264       1,130       4,607        4,381
assets
Acquisition expenses &           3,027       142         8,247        4,831
litigation settlement
Other                            16,304      13,383      61,070       54,380
Total operating expenses         56,899      47,837      211,757      190,372
Income before income taxes       26,627      28,104      108,805      103,527
Income taxes                     7,823       9,116       31,737       30,385
Net income                       $18,804     $18,988     $77,068      $73,142
Basic earnings per share         $0.47       $0.51       $1.95        $2.03
Diluted earnings per share     $0.47     $0.51     $1.93      $2.01

                                                            
Summary of
Financial Data
(Dollars in
thousands, except                                            
per share data)
                       2012                                            2011
                    4th Qtr   3rd Qtr   2nd Qtr   1st Qtr     4th Qtr
Earnings                                                   
Loan income            $49,405     $48,590     $47,077     $47,638     $50,511
Investment income      22,545      22,804      23,468      19,873      19,903
Total interest         71,950      71,394      70,545      67,511      70,414
income
Interest expense       11,981      12,619      12,774      13,602      15,279
Net interest           59,969      58,775      57,771      53,909      55,135
income
Provision for loan     2,666       2,643       2,155       1,644       1,593
losses
Net interest
income after           57,303      56,132      55,616      52,265      53,542
provision for loan
losses
Deposit service        12,603      12,057      11,035      10,369      11,027
fees
Mortgage banking       161         128         234         320         37
revenues
Other banking          613         1,277       662         674         694
services
Wealth management      3,449       3,194       3,101       3,132       2,831
services
Benefit trust,
administration,        9,397       8,912       8,664       8,973       7,879
consulting and
actuarial fees
Investment
securities             0           291         0           0           (69)
gains/(losses),
net
Total noninterest      26,223      25,859      23,696      23,468      22,399
income
Salaries and           29,639      28,126      26,844      27,425      27,093
employee benefits
Occupancy and
equipment and          6,665       6,541       6,130       6,463       6,089
furniture
Amortization of        1,264       1,212       1,045       1,086       1,130
intangible assets
Acquisition
expenses &             3,027       4,796       164         260         142
litigation
settlement
Other                  16,304      15,410      15,187      14,169      13,383
Total operating        56,899      56,085      49,370      49,403      47,837
expenses
Income before          26,627      25,906      29,942      26,330      28,104
income taxes
Income taxes           7,823       7,539       8,871       7,504       9,116
Net income             $18,804     $18,367     $21,071     $18,826     $18,988
Basic earnings per     $0.47       $0.46       $0.53       $0.49       $0.51
share
Diluted earnings     $0.47     $0.46     $0.53     $0.48       $0.51
per share
Profitability                                              
Return on assets       1.00%       0.98%       1.20%       1.14%       1.16%
Return on equity       8.20%       8.12%       9.82%       9.22%       9.96%
Return on tangible     13.55%      13.27%      16.01%      15.59%      17.91%
equity^(3)
Noninterest
income/operating       29.0%       28.8%       27.6%       28.8%       27.6%
income (FTE) ^ (1)
Efficiency ratio     58.2%     56.5%     56.1%     59.0%       57.2%
^(2)
Components of Net
Interest Margin                                            
(FTE)
Loan yield             5.16%       5.25%       5.42%       5.58%       5.80%
Cash equivalents       0.26%       0.26%       0.34%       0.26%       0.25%
yield
Investment yield       3.85%       3.82%       3.97%       4.33%       4.49%
Earning asset          4.54%       4.54%       4.78%       4.89%       5.11%
yield
Interest-bearing       0.34%       0.40%       0.44%       0.56%       0.65%
deposit rate
Borrowing rate         3.89%       3.56%       2.85%       3.79%       4.21%
Cost of all
interest-bearing       0.89%       0.94%       0.99%       1.13%       1.27%
funds
Cost of funds          0.74%       0.78%       0.84%       0.96%       1.08%
(includes DDA)
Net interest           3.83%       3.79%       3.96%       3.96%       4.06%
margin (FTE)
Fully
tax-equivalent       $4,209    $4,332    $4,335    $4,031      $3,851
adjustment

                                                                         
Summary of
Financial Data
(Dollars in
thousands, except                                                         
per share data)
                        2012                                                        2011
                     4th Qtr      3rd Qtr      2nd Qtr      1st Qtr        4th Qtr
Average Balances                                                        
Loans                   $3,834,068     $3,708,143     $3,512,427     $3,454,240     $3,473,366
Cash equivalents        106,851        138,251        10,017         251,828        233,984
Taxable investment      2,035,651      2,065,121      2,091,575      1,565,215      1,495,590
securities
Nontaxable
investment              691,525        717,608        692,839        613,947        567,835
securities
Total
interest-earning        6,668,095      6,629,123      6,306,858      5,885,230      5,770,775
assets
Total assets            7,506,371      7,426,818      7,058,473      6,618,812      6,474,722
Interest-bearing        4,545,347      4,409,813      4,003,213      3,964,062      3,929,231
deposits
Borrowings              830,149        918,789        1,182,707      859,774        830,344
Total
interest-bearing        5,375,496      5,328,602      5,185,920      4,823,836      4,759,575
liabilities
Noninterest-bearing     1,098,193      1,066,689      907,153        884,451        878,443
deposits
Shareholders'         912,321      900,147      862,747      821,043        756,334
equity
Balance Sheet Data                                                      
Cash and cash           $228,558       $287,753       $130,902       $132,055       $324,878
equivalents
Investment              2,818,527      2,895,285      2,931,918      2,765,145      2,151,370
securities
Loans:
Business lending        1,233,944      1,233,928      1,216,309      1,210,773      1,226,439
Consumer mortgage       1,448,415      1,390,130      1,289,155      1,245,217      1,214,621
Consumer
installment -           647,518        642,196        591,249        542,605        556,955
indirect
Home equity             364,225        372,493        310,555        317,716        323,840
Consumer
installment -           171,474        173,710        154,402        144,428        149,170
direct
Total loans             3,865,576      3,812,457      3,561,670      3,460,739      3,471,025
Allowance for loan      42,888         42,817         41,828         41,809         42,213
losses
Intangible assets       387,133        388,398        358,435        359,480        360,564
Other assets            239,894        229,297        225,234        236,848        222,651
Total assets            7,496,800      7,570,373      7,166,331      6,912,458      6,488,275
Deposits:
Noninterest-bearing     1,110,994      1,098,135      944,695        911,131        894,464
Non-maturity            3,501,630      3,533,837      2,942,333      2,974,191      2,776,532
interest-bearing
Time                    1,015,415      1,076,657      1,023,324      1,066,685      1,124,249
Total deposits          5,628,039      5,708,629      4,910,352      4,952,007      4,795,245
Borrowings              728,061        728,116        1,157,872      910,427        728,281
Subordinated debt
held by                 102,073        102,067        102,060        102,054        102,048
unconsolidated
subsidiary trusts
Other liabilities       135,849        126,962        110,988        107,297        88,118
Total liabilities       6,594,022      6,665,774      6,281,272      6,071,785      5,713,692
Shareholders'           902,778        904,599        885,059        840,673        774,583
equity
Total liabilities
and shareholders'     7,496,800    7,570,373    7,166,331    6,912,458      6,488,275
equity
Capital                                                                 
Tier 1 leverage         8.40%          8.32%          8.98%          9.37%          8.38%
ratio
Tangible equity/net
tangible assets         7.62%          7.54%          8.09%          7.70%          7.12%
^(3)
Diluted weighted
average common          40,179         40,139         40,057         39,323         37,491
shares O/S
Period end common       39,626         39,571         39,472         39,439         36,986
shares outstanding
Cash dividends
declared per common     $0.27          $0.27          $0.26          $0.26          $0.26
share
Book value              $22.78         $22.86         $22.42         $21.32         $20.94
Tangible book           $13.72         $13.73         $14.00         $12.84         $11.85
value^(3)
Common stock price    $27.36       $28.19       $27.12       $28.78         $27.80
(end of period)

                                                               
Summary of Financial
Data
(Dollars in
thousands, except                                                
per share data)
                         2012                                            2011
                      4th Qtr   3rd Qtr   2nd Qtr   1st Qtr     4th Qtr
Asset Quality                                                
Nonaccrual loans         $26,318     $27,370     $28,571   $27,757     $28,285
Accruing loans 90+       2,748       3,349       3,437       3,889       3,090
days delinquent
Total nonperforming      29,066      30,719      32,008      31,646      31,375
loans
Other real estate        4,788       3,384       2,899       2,690       2,682
owned (OREO)
Total nonperforming      33,854      34,103      34,907      34,336      34,057
assets
Net charge-offs          2,596       1,654       2,136       2,048       1,844
Allowance for loan
losses/loans             1.11%       1.12%       1.17%       1.21%       1.22%
outstanding
Nonperforming
loans/loans              0.75%       0.81%       0.90%       0.91%       0.90%
outstanding
Allowance for loan
losses/nonperforming     148%        139%        131%        132%        135%
loans
Net
charge-offs/average      0.27%       0.18%       0.24%       0.24%       0.21%
loans
Delinquent               1.92%       1.79%       1.71%       1.78%       2.05%
loans/ending loans
Loan loss
provision/net            103%        160%        101%        80%         86%
charge-offs
Nonperforming          0.45%     0.45%     0.49%     0.50%       0.52%
assets/total assets
Asset Quality
(excluding loans                                             
acquired since
1/1/09)
Nonaccrual loans         $21,938     $21,733     $22,395     $20,178     $17,585
Accruing loans 90+       2,356       3,038       3,070       2,700       2,878
days delinquent
Total nonperforming      24,294      24,771      25,465      22,878      20,463
loans
Other real estate        1,397       1,671       1,577       1,778       1,734
owned (OREO)
Total nonperforming      25,691      26,442      27,042      24,656      22,197
assets
Net charge-offs          1,863       1,754       1,217       752         1,844
Allowance for loan
losses/loans             1.21%       1.24%       1.28%       1.30%       1.36%
outstanding
Nonperforming
loans/loans              0.71%       0.74%       0.79%       0.74%       0.69%
outstanding
Allowance for loan
losses/nonperforming     170%        167%        161%        175%        197%
loans
Net
charge-offs/average      0.19%       0.21%       0.16%       0.10%       0.24%
loans
Delinquent               1.82%       1.65%       1.62%       1.61%       1.77%
loans/ending loans
Loan loss
provision/net            102%        119%        180%        37%         79%
charge-offs
Nonperforming          0.36%     0.37%     0.40%     0.38%       0.36%
assets/total assets


^(1)  Excludes gain (loss) on investment securities.
^(2)   Excludes intangible amortization, acquisition expenses, litigation
       settlement, and gain (loss) on investment securities.
^(3)   Includes deferred tax liabilities (of approximately $27.9 million at
       12/31/12) generated from tax deductible goodwill.
       

This press release contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. The following factors,
among others, could cause the actual results of CBU’s operations to differ
materially from CBU’s expectations: the successful integration of operations
of its acquisitions; competition; changes in economic conditions, interest
rates and financial markets; and changes in legislation or regulatory
requirements. CBU does not assume any duty to update forward-looking
statements.

Contact:

Community Bank System, Inc.
Scott A. Kingsley, 315-445-3121
EVP & Chief Financial Officer
 
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