Community Bank System Reports Record Third Quarter Earnings

  Community Bank System Reports Record Third Quarter Earnings

- Organic loan growth of $89 million in the quarter (9% annualized)

- Cash dividend increased for 21^st consecutive year

- Branch acquisition pending

Business Wire

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

Community Bank System, Inc. (NYSE: CBU) reported net income of $22.0 million
for third quarter 2013, compared with $18.4 million for the third quarter of
2012. Diluted earnings per share were $0.54 for the third quarter of 2013,
versus $0.46 in the prior year third quarter, which included eight cents per
share of acquisition expenses. The Company reported earnings of $63.4 million
($1.56 per share) for the first nine months of 2013, an increase of $5.1
million, or 8.7%, compared to the equivalent prior year period.

Total revenue for the third quarter of 2013 was$88.2 million, an increase
of$3.6 million, or 4.2%, compared to third quarter 2012. Revenue growth was
supported by higher non-interest income from an increased core deposit account
base, along with continued solid organic growth in wealth management and
benefits administration services. Net interest income was up 3.1% from the
third quarter 2012, reflecting productive acquired and organic loan growth
over the past twelve months, as well as the balance sheet restructuring
activities completed in the first half of 2013. Third quarter net interest
income also included approximately $0.5 million (or one cent per share) of
incremental yield accretion from the favorable disposition of an acquired
impaired commercial relationship. The quarterly provision for loan losses
of$2.1 millionwas$0.5 millionlower than the third quarter of 2012,
reflective of lower net charge-offs and the continuation of generally stable
and favorable asset quality metrics. Total operating expenses of$55.0
millionfor the third quarter 2013 were$3.7 million, or 7.2% higher than the
prior year quarter (excluding acquisition expenses), primarily the result of
the recurring operating costs associated with the branch acquisitions
completed in 2012.

“We continued to perform at a very high level during the third quarter of
2013, generating record earnings, solid organic loan growth, high
single-digit, year-over-year growth in financial services revenue, and
continued strong asset quality metrics,” said President and Chief Executive
Officer Mark E. Tryniski. “During the third quarter, we also announced an
agreement to acquire eight branch-banking locations from Bank of America,
N.A., which will further expand and strengthen our market presence across our
Northeast Pennsylvania service footprint. Recognizing the Company’s continued
solid financial performance and strong capital position, the Board raised the
quarterly cash dividend by 3.7% in August, marking the twenty-first
consecutive year of increased dividend payouts. We believe that our strong
competitive position, superior asset quality, and consistent and disciplined
approach to business leaves us well positioned for the future.”

Third quarter net interest income of $60.6 million increased 3.1% compared
with the prior year period, despite a planned net reduction of
interest-earning assets and interest-bearing liabilities during the first six
months of 2013. Third quarter interest income was down $5.3 million compared
to the prior year quarter as a result of a $156.6 million net decrease in
interest-earning assets as well as a 26-basis point decline in the earning
asset yield, driven by lower yields on both loans (down 49 basis points) and
investment securities (down 30 basis points). This was more than offset by a
$7.1 million decrease in interest expense, reflecting a $228.3 million
reduction in interest-bearing liabilities coupled with a 43-basis point
decline in the Company’s cost of funds. The lower cost of funds was driven by
continued low market interest rates that enabled the Company to lower deposit
rates to produce an 18-basis point decline in the interest-bearing deposit
rate in comparison to third quarter 2012, and also benefitted from the
extinguishment of certain higher cost borrowings in early 2013. During the
first half of 2013, the Company completed a balance sheet restructuring
program that involved selling nearly $650 million of longer duration
investment securities and using the proceeds to retire $502 million of Federal
Home Loan Bank (FHLB) borrowings.

Compared to the prior year, third quarter non-interest income of $27.6 million
increased $1.7 million, or 6.7%, driven by increased banking service fees and
growing financial services revenue. Deposit service revenues grew $0.6
million, or 5.4%, to $12.7 million, principally due to a larger base of core
deposit accounts. Wealth management revenue was up $0.6 million, or 19.7%,
over third quarter 2012, driven by business expansion in trust services, asset
management and advisory services, and favorable market conditions. Employee
benefits administration and consulting revenues of $9.4 million increased 5.4%
from the third quarter of 2012, benefitting from new and expanded customer
relationships as well as positive equity market influences. Noninterest income
for the nine months ended September 30, 2013 was $80.8 million (31% of total
revenue), an increase of $7.8 million, or 10.7%, compared to the first nine
months of 2012.

Quarterly operating expenses were up $3.7 million, or 7.2%, to $55.0 million,
compared to $51.3 million for third quarter 2012 (excluding acquisition
expenses of $4.8 million), principally reflecting the additional costs of
operating an expanded franchise. Excluding acquisition expenses, year-to-date
operating expenses were $163.9 million, an increase of $14.3 million, or 9.5%
higher than the first nine months of 2012.

The 2013 third quarter and nine month effective income tax rate of 29.2% was
consistent with the 29.1% rate reported in the first nine months of 2012,
reflective of generally stable proportions of income being generated from
fully taxable and non-taxable sources.

Financial Position

Average earning assets for the third quarter of 2013 were $6.5 billion, a
decrease of $156.6 million, or 2.4%, compared to the third quarter of 2012, a
net result of the balance sheet restructuring activities that were undertaken
during the first two quarters of 2013 and solid organic loan growth over the
past twelve months. Average earning assets increased $216.4 million from the
second quarter of 2013, and included $86.0 million of growth in average loans,
and a $130.4 million increase in average investments and cash equivalents, as
the Company continued to early invest a portion of the expected liquidity from
the pending branch acquisition in the third quarter. Ending loans increased
$213.0 million, or 5.6%, over the prior year quarter, reflecting strong
organic growth in the Bank’s consumer lending portfolios. Total deposits of
$5.69 billion at third quarter-end increased by $17.2 million, or 0.3%, from
June 30, 2013. The Company’s Tier 1 leverage ratio on September 30, 2013 was
9.39%, up 107 basis points compared with the third quarter of 2012. The
tangible equity to net tangible assets ratio of 7.38% at September 30, 2013
was generally consistent with levels reported over the last four quarters.

Balance Sheet Restructuring

During the first six months of 2013, the Company initiated and completed a
balance sheet restructuring that involved selling $648.8 million of investment
securities with realized gains of $63.8 million, and extinguishing $501.6
million of FHLB borrowings, incurring $63.5 million of early extinguishment
costs. The Company’s balance sheet was reduced by approximately 7% through the
first half of 2013 as a result of this planned initiative. Although these
transactions were essentially neutral to earnings as well as total capital for
this period, more than $35 million of incremental regulatory (Tier 1) capital
was created, and the Company expects the transactions to be modestly additive
to future net interest income generation.

Asset Quality

The Company’s asset quality metrics for the third quarter of 2013 remained
substantially better than comparative industry averages and illustrate the
long-term effectiveness of the Company’s disciplined risk management and
underwriting standards. Net charge-offs were $1.4 million for the third
quarter, compared to $1.7 million for the third quarter of 2012 and $0.8
million for the second quarter of 2013. Nonperforming loans as a percentage of
total loans were 0.61% at September 30, 2013, down from 0.62% at June 30,
2013, and down from 0.81% at September 30, 2012. The total delinquency ratio
of 1.48% at the end of the third quarter was down 31 basis points from third
quarter 2012 and was two basis points lower than at the end of the second
quarter of 2013. The third quarter provision for loan losses of $2.1 million
was down $0.5 million, or 21%, compared to third quarter 2012, consistent with
the lower nonperforming loans and a lower level of net charge-offs as a
percentage of average loans in the current quarter. The allowance for loan
losses to nonperforming loans was 181% at September 30, 2013, compared to 139%
at September 30, 2012, and 178% as of June 30, 2013.

Cash Dividend Increased for 21^st Consecutive Year

The Company announced on August 21, 2013 that it would raise its quarterly
cash dividend by one cent, or 3.7%, to $0.28 per share on its common stock.
The dividend was paid on October 10, 2013 to shareholders of record on
September 16, 2013. The Company’s third quarter 2013 dividend payout ratio was
51.2%, resulting in the meaningful retention of generated capital that can be
used for future strategic growth objectives. The Company views the growth of
cash dividends over time as an important component of its commitment to
provide consistent and favorable long-term returns to shareholders.

Acquisition Will Strengthen Pennsylvania Franchise

On July 24, 2013, the Company announced that it had entered into a purchase
and assumption agreement to acquire eight branch-banking locations across its
Northeast Pennsylvania markets from Bank of America, N.A.. The transaction
will elevate the Bank’s market presence in Northeast Pennsylvania, is expected
to add approximately $340 million of customer deposits, and will provide
greater market density and improved operating leverage. The branch transaction
is expected to be completed during the fourth quarter of 2013.

Stock Repurchase Authorization

The Company’s Board of Directors approved a stock repurchase program in
December 2012, authorizing the repurchase of up to 2.0 million shares of the
Company’s common stock at the discretion of executive management. The
authorization period started on January 1, 2013 and ends on December 31, 2013.
The Company has not repurchased any stock during the first nine months of
2013.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow
(Wednesday) October 23, 2013 to discuss third quarter results. The conference
call can be accessed at 866-963-1218 (1-904-520-5763 if outside United States
and Canada). An audio recording will be available one hour after the call
until December 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 2990131.
Investors may also listen live via the Internet at:
http://www.videonewswire.com/event.asp?id=96269. The recording will be
archived until October 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 more than $7.3
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 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.

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.


Summary of Financial Data
(Dollars in
thousands, expect      
per share data)
                           Quarter Ended             Year-to-Date
                           September   September   September   September
                           30,           30,           30,           30,
Earnings               2013        2012        2013        2012
Loan income                $47,606       $48,590       $141,136      $143,305
Investment income          18,526        22,804        57,061        66,145
Total interest             66,132        71,394        198,197       209,450
income
Interest expense           5,531         12,619        20,739        38,995
Net interest               60,601        58,775        177,458       170,455
income
Provision for loan         2,093         2,643         4,807         6,442
losses
Net interest
income after               58,508        56,132        172,651       164,013
provision for loan
losses
Deposit service            12,703        12,057        36,643        33,461
fees
Mortgage banking           599           128           1,111         682
revenues
Other banking              1,072         1,277         2,618         2,613
services
Wealth management          3,823         3,194         11,566        9,427
services
Benefit trust,
administration,            9,397         8,912         28,564        26,549
consulting and
actuarial fees
Gain on sales of
investment                 0             291           63,799        291
securities
Loss on debt               0             0             (63,500)      0
extinguishments
Total noninterest          27,594        25,859        80,801        73,023
income
Salaries and               30,448        28,126        91,217        82,395
employee benefits
Occupancy and
equipment and              6,448         6,541         20,263        19,134
furniture
Amortization of            1,089         1,212         3,408         3,343
intangible assets
Acquisition                71            4,796         71            5,221
expenses
Other                      16,988        15,410        49,013        44,765
Total operating            55,044        56,085        163,972       154,858
expenses
Income before              31,058        25,906        89,480        82,178
income taxes
Income taxes               9,069         7,539         26,128        23,914
Net income                 $21,989       $18,367       $63,352       $58,264
Basic earnings per         $0.55         $0.46         $1.58         $1.48
share
Diluted earnings       $0.54       $0.46       $1.56       $1.46
per share



Summary of Financial Data
(Dollars in
thousands,           
except per share
data)
                         2013                                2012
                    3rd Qtr   2nd Qtr    1st Qtr    4th Qtr   3rd Qtr
Earnings                                                   
Loan income              $47,606   $46,412    $47,118    $49,405   $48,590
Investment               18,526      17,728       20,807       22,545      22,804
income
Total interest           66,132      64,140       67,925       71,950      71,394
income
Interest expense         5,531       5,708        9,500        11,981      12,619
Net interest             60,601      58,432       58,425       59,969      58,775
income
Provision for            2,093       1,321        1,393        2,666       2,643
loan losses
Net interest
income after             58,508      57,111       57,032       57,303      56,132
provision for
loan losses
Deposit service          12,703      12,345       11,595       12,603      12,057
fees
Mortgage banking         599         341          171          161         128
revenues
Other banking            1,072       679          867          613         1,277
services
Wealth
management               3,823       4,045        3,698        3,449       3,194
services
Benefit trust,
administration,          9,397       9,397        9,770        9,397       8,912
consulting and
actuarial fees
Gain on sales of
investment               0           16,008       47,791       0           291
securities
Loss on debt             0           (15,717)     (47,783)     0           0
extinguishments
Total
noninterest              27,594      27,098       26,109       26,223      25,859
income
Salaries and
employee                 30,448      30,286       30,483       29,639      28,126
benefits
Occupancy and            6,448       6,750        7,065        6,665       6,541
equipment
Amortization of
intangible               1,089       1,140        1,179        1,264       1,212
assets
Acquisition              71          0            0            527         4,796
expenses
Other                    16,988      16,200       15,825       18,804      15,410
Total operating          55,044      54,376       54,552       56,899      56,085
expenses
Income before            31,058      29,833       28,589       26,627      25,906
income taxes
Income taxes             9,069       8,711        8,348        7,823       7,539
Net income               21,989      21,122       20,241       18,804      18,367
Basic earnings           $0.55       $0.53        $0.51        $0.47       $0.46
per share
Diluted earnings     $0.54     $0.52      $0.50      $0.47     $0.46
per share
Profitability                                              
Return on assets         1.22%       1.21%        1.11%        1.00%       0.98%
Return on equity         10.26%      9.70%        9.18%        8.20%       8.12%
Return on
tangible                 17.57%      16.38%       15.32%       13.55%      13.27%
equity^(3)
Noninterest
income/operating         30.0%       30.2%        29.5%        29.0%       28.8%
income (FTE) ^
(1)
Efficiency ratio     58.6%     59.9%      60.3%      58.2%     56.5%
^(2)
Components of
Net Interest                                               
Margin (FTE)
Loan yield               4.76%       4.79%        4.98%        5.16%       5.25%
Cash equivalents         0.22%       0.26%        0.26%        0.26%       0.26%
yield
Investment yield         3.52%       3.83%        3.79%        3.85%       3.82%
Earning asset            4.28%       4.35%        4.44%        4.54%       4.54%
yield
Interest-bearing         0.22%       0.24%        0.28%        0.34%       0.40%
deposit rate
Borrowing rate           2.02%       3.36%        3.76%        3.89%       3.56%
Cost of all
interest-bearing         0.43%       0.46%        0.73%        0.89%       0.94%
funds
Cost of funds            0.35%       0.38%        0.61%        0.74%       0.78%
(includes DDA)
Net interest             3.94%       3.98%        3.86%        3.83%       3.79%
margin (FTE)
Fully
tax-equivalent       $3,727    $3,644     $4,022     $4,209    $4,332
adjustment



Summary of Financial Data
(Dollars in
thousands, except       
per share data)
                            2013                                       2012
                       3rd Qtr      2nd Qtr      1st Qtr      4th Qtr      3rd Qtr
Average Balances                                                        
Loans                       $3,985,755   $3,899,744   $3,860,722   $3,834,068   $3,708,143
Cash equivalents            8,644          148,188        83,812         106,851        138,251
Taxable investment          1,833,355      1,565,756      1,965,073      2,035,651      2,065,121
securities
Nontaxable
investment                  644,728        642,424        655,694        691,525        717,608
securities
Total
interest-earning            6,472,482      6,256,112      6,565,301      6,668,095      6,629,123
assets
Total assets                7,154,796      7,003,823      7,368,906      7,506,371      7,426,818
Interest-bearing            4,511,199      4,581,206      4,581,130      4,545,347      4,409,813
deposits
Borrowings                  589,066        358,627        686,483        830,149        918,789
Total
interest-bearing            5,100,265      4,939,833      5,267,613      5,375,496      5,328,602
liabilities
Noninterest-bearing         1,138,039      1,095,774      1,095,256      1,098,193      1,066,689
deposits
Shareholders'           850,238      873,108      893,746      912,321      900,147
equity
Balance Sheet Data                                                      
Cash and cash               $174,205       $148,573       $330,298       $228,558       $287,753
equivalents
Investment                  2,518,574      2,366,512      2,448,120      2,818,527      2,895,285
securities
Loans:
Business lending            1,214,796      1,225,671      1,222,835      1,233,944      1,233,928
Consumer mortgage           1,570,607      1,527,341      1,480,192      1,448,415      1,390,130
Consumer indirect           713,310        663,924        639,560        647,518        642,196
Home equity                 348,246        347,335        353,365        364,225        372,493
Consumer direct             178,496        171,727        165,649        171,474        173,710
Total loans                 4,025,455      3,935,998      3,861,601      3,865,576      3,812,457
Allowance for loan          44,083         43,473         42,913         42,888         42,817
losses
Intangible assets,          383,735        384,815        385,954        387,134        388,398
net
Other assets                244,131        228,291        238,013        239,893        229,297
Total assets                7,302,017      7,020,716      7,221,073      7,496,800      7,570,373
Deposits:
Noninterest-bearing         1,158,013      1,120,683      1,115,417      1,110,994      1,098,135
Non-maturity                3,630,684      3,608,829      3,678,905      3,501,630      3,533,837
interest-bearing
Time                        898,636        940,618        980,502        1,015,415      1,076,657
Total deposits              5,687,333      5,670,130      5,774,824      5,628,039      5,708,629
Borrowings                  567,116        322,319        361,422        728,061        728,116
Subordinated debt
held by                     102,091        102,085        102,079        102,073        102,067
unconsolidated
subsidiary trusts
Accrued interest
and other                   79,798         76,151         105,454        135,849        126,962
liabilities
Total liabilities           6,436,338      6,170,685      6,343,779      6,594,022      6,665,774
Shareholders'               865,679        850,031        877,294        902,778        904,599
equity
Total liabilities
and shareholders'       7,302,017    7,020,716    7,221,073    7,496,800    7,570,373
equity
Capital                                                                 
Tier 1 leverage             9.39%          9.43%          8.78%          8.40%          8.32%
ratio
Tangible equity/net
tangible assets             7.38%          7.43%          7.58%          7.62%          7.54%
^(3)
Diluted weighted
average common              40,850         40,558         40,321         40,179         40,139
shares O/S
Period end common           40,296         40,099         39,989         39,626         39,571
shares outstanding
Cash dividends
declared per common         $0.28          $0.27          $0.27          $0.27          $0.27
share
Book value                  $21.48         $21.20         $21.94         $22.78         $22.86
Tangible book               $12.73         $12.35         $13.01         $13.72         $13.73
value^(3)
Common stock price      $34.12       $30.85       $29.63       $27.36       $28.19
(end of period)



Summary of Financial    
Data
(Dollars in
thousands, except            
per share data)
                             2013                              2012
                        3rd Qtr   2nd Qtr   1st Qtr   4th Qtr   3rd Qtr
Asset Quality                                                
Nonaccrual loans             $21,713   $22,997   $24,806   $26,360   $27,370
Accruing loans 90+           2,650       1,439       2,560       2,748       3,349
days delinquent
Total nonperforming          24,363      24,436      27,366      29,108      30,719
loans
Other real estate            5,218       5,066       6,838       4,788       3,384
owned (OREO)
Total nonperforming          29,581      29,502      34,204      33,896      34,103
assets
Net charge-offs              1,424       761         1,368       2,596       1,654
Allowance for loan
losses/loans                 1.10%       1.10%       1.11%       1.11%       1.12%
outstanding
Nonperforming
loans/loans                  0.61%       0.62%       0.71%       0.75%       0.81%
outstanding
Allowance for loan
losses/nonperforming         181%        178%        157%        147%        139%
loans
Net
charge-offs/average          0.14%       0.08%       0.14%       0.27%       0.18%
loans
Delinquent                   1.48%       1.50%       1.55%       1.92%       1.79%
loans/ending loans
Loan loss
provision/net                147%        173%        102%        103%        160%
charge-offs
Nonperforming            0.41%     0.42%     0.47%     0.45%     0.45%
assets/total assets
Asset Quality
(excluding loans                                             
acquired since
1/1/09)
Nonaccrual loans             $17,365     $18,272     $19,756     $21,928     $21,733
Accruing loans 90+           2,471       1,349       2,164       2,355       3,038
days delinquent
Total nonperforming          19,836      19,621      21,920      24,283      24,771
loans
Other real estate            2,767       2,963       3,844       1,397       1,671
owned (OREO)
Total nonperforming          22,603      22,584      25,764      25,680      26,442
assets
Net charge-offs              1,583       604         1,102       1,863       1,754
Allowance for loan
losses/loans                 1.16%       1.19%       1.21%       1.21%       1.24%
outstanding
Nonperforming
loans/loans                  0.54%       0.55%       0.64%       0.71%       0.74%
outstanding
Allowance for loan
losses/nonperforming         215%        215%        190%        171%        167%
loans
Net
charge-offs/average          0.17%       0.07%       0.13%       0.19%       0.21%
loans
Delinquent                   1.45%       1.44%       1.48%       1.82%       1.65%
loans/ending loans
Loan loss
provision/net                126%        210%        113%        102%        119%
charge-offs
Nonperforming            0.33%     0.34%     0.38%     0.36%     0.37%
assets/total assets


^(1)  Excludes gains and losses on sales of investment securities and debt
       prepayments.
       
       Excludes intangible amortization, acquisition expenses, litigation
^(2)   settlement, and gains and losses on sales of investment securities and
       debt prepayments.
       
^(3)   Includes deferred tax liabilities (of approximately $31.0 million at
       9/30/13) 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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