Community Bank System Reports Higher Second Quarter Earnings

SYRACUSE, N.Y., July 18 /PRNewswire-FirstCall/ -- Community Bank System, Inc. earned quarterly net income of $10.4 million in the second quarter of 2007, a 7.3% increase from the $9.7 million generated last quarter and a 4.8% increase from the $9.9 million earned in the second quarter of 2006. Earnings per share for the quarter were $0.34, 6.3% higher than the $0.32 earned last quarter, and 3% greater than the $0.33 per share generated in last year's second quarter. Cash earnings per share (which exclude the after-tax effect of intangible asset amortization and acquisition-related market value adjustments) were $0.39 in the second quarter, $0.05 per share, or 15%, above GAAP-reported results. Year-to-date net earnings of $20.0 million, or $0.66 per share, were 3.5% greater than the first six months of 2006.

President and Chief Executive Officer, Mark E. Tryniski commented, "Our second quarter's highlights featured a 22% increase in non-interest income over the second quarter of 2006, with sizable contributions from both banking and financial services sources. Loans grew substantially as well, increasing $85 million or 3.2% over the first quarter of 2007. Approximately one-third of this was organic growth, with the remaining two-thirds attributable to the Tupper Lake National Bank acquisition, which closed in early June. In fact, our organic and acquired loan growth is over 13% during the last 12 months, and we continue to generate improved bottom-line results despite lower net interest margins. In addition, our asset quality metrics remained outstanding, with non-performing asset and loan charge-off ratios actually decreasing from their remarkably low levels last quarter, resulting in continued reductions in credit costs."

Net interest income was consistent with both the first quarter of 2007 and the second quarter of 2006, despite a ten-basis-point decrease in net interest margin from the previous two quarters to 3.64%. Slightly higher loan yields in the quarter were offset by higher funding costs, principally time deposit related, resulting in the net margin compression.

Total loans at the end of the second quarter were $2.77 billion, up 13.2% from the prior year, a result of both acquired and organic loan growth in all portfolios. The company's loan portfolio continues to be very well balanced, with 35.7% of total loans found in business lending, 34.3% in consumer mortgages, and 30.0% in consumer installment loans, including home equity products. The company's consumer real estate portfolio does not include exposure to subprime, Alt-A, or other higher-risk mortgage products.

Non-interest income (excluding investment securities gains/losses) rose more than $1.5 million, or 11.4%, over the first quarter of 2007, with banking service income rising $0.6 million, or 8.1%, while financial services revenue climbed $0.9 million, or 16.2%. The banking services increase came mainly from new and expanded account relationships and growing debit card-related revenues. The increase in financial services revenue over the first quarter was due largely to the mid-May acquisition of Hand Benefits & Trust, a provider of administration, consulting, and actuarial services to sponsors of employee benefit plans. Non-interest income for the quarter was 22% higher than its year-ago period, and included meaningful organic growth as well as incremental revenues from acquisitions.

Operating expenses increased $0.2 million versus the prior quarter, due principally to the two acquisitions completed during the quarter. Year-over- year operating expenses increased $2.9 million, or 9.4%, comprised of higher personnel and other operating expenses related to the four acquisitions completed in the last 11 months.

The company's effective income tax rate of 25.0% in the second quarter of 2007 was higher than the 24.1% rate incurred during first quarter of 2007 and the second quarter of 2006.

Asset Quality

The $0.4 million loan loss provision for the quarter was slightly higher than the $0.2 million reported last quarter, but still significantly lower than the $1.7 million reported a year earlier. Net charge-offs of $0.4 million, or 0.05% of average loans, were down 77% from $1.5 million, or 0.26% of average loans, in the second quarter of 2006. They were also down 42% from $0.6 million, or 0.09% of average loans, in the first quarter of 2007. As of June 30, 2007, the company's nonperforming loan ratio was 0.36%, lower than the 0.47% level recorded in each of the last three quarters, as well as the 0.45% level of a year ago. The delinquency ratio was 0.95% at June 30, compared favorably to the already improved levels of 1.02% at March 31, 2007, and 1.15% at June 30, 2006. Nonperforming assets to total assets were 0.25%, an improvement from the favorable 0.32% reported in the previous quarter, as well as the 0.30% of a year earlier. These highly attractive asset quality metrics reflect the company's enhanced credit risk management programs and disciplined underwriting standards.

Financial Position

Average earning assets of $4.1 billion for the second quarter of 2007 were up 1.4% from the prior quarter. Compared to the second quarter of 2006, average earning assets rose $335.6 million, or 9.0%, due principally to increases in loans, both organic and acquired. The average total deposit balance for the quarter increased $100.8 million to $3.3 billion, a 3.2% rise from the first quarter of 2007, while the period-end level of total deposits represented a 10.7% increase over its year-ago level, climbing from $3.04 billion to $3.36 billion. Total borrowings decreased by nearly $50 million from the first quarter of 2007, as the company elected to not fully reinvest cash flows from maturing securities during the quarter, and instead reduced borrowings.

In addition, the company is currently in the process of reviewing early extinguishment of its two $25 million, variable-rate trust preferred obligations, which include premium call provisions of slightly over 6%. The company estimates the impact of the one-time charge associated with this potential action to be between $0.09 and $0.10 per share, and expects to conclude its evaluation prior to year-end.

Stock Repurchases

During the second quarter of 2007 the company purchased 232,500 common shares, at an aggregate cost of approximately $4.8 million, under the previously announced share repurchase programs authorized in December 2006. At June 30, 2007, there were 1.25 million shares available for repurchase under these programs.

Expansion Initiatives

During the quarter, the company completed the acquisition of both Hand Benefits & Trust (HB&T) and Tupper Lake National Bank (TLNB), and opened a de novo branch in Springville, N.Y.

Based in Houston, HB&T significantly expands the geographic and product diversity offered by its BPAS, Inc. subsidiary which now has annual revenues exceeding $20 million. It adds a physical presence in the Southwest and enhances the company's service offerings in flexible spending account and collective investment fund administration services.

The TLNB transaction added nearly $100 million in assets, five branches and a small insurance agency in northeastern New York. Its Plattsburgh and Saranac Lake locations give the company its first facilities in Clinton and Essex counties, respectively, and its two Tupper Lake branches strengthen its presence in Franklin County to a "number-one" deposit market share position. In conjunction with this transaction, the company will maintain two regional advisory boards in these markets to help further develop business strategies, identify opportunities and facilitate expanded market development.

The new Springville location positions the company closer to opportunities in the southern Erie County suburbs, south of Buffalo. The company continues to evaluate expansion alternatives of both an acquisition and de novo nature.

Other Developments

Mr. Tryniski further commented, "In June, our company received a very special honor, ranking second in the nation in J.D. Power & Associates' '2007 Retail Banking Satisfaction Study.' The survey included bank customers across 39 states, and we outscored all of the money-center, super-regional, and regional banks in the nation, finishing second only to one, which is not in any of our markets. It is a testament not only to the truly unique approach we take with our customers and the communities we serve, but also to the high character and dedication of our more than 1,500 employees. I am proud of and thankful to our employees for this truly exceptional accomplishment, and look forward to the continuation and enhancement of the strategies and programs that allowed us this highest form of recognition."

Conference Call Scheduled

A conference call will be held with company management at 11:00 a.m. (ET) on Thursday, July 19, 2007, to discuss the above results at 1-866-838-2057. An audio recording will be available one hour after the call until September 30, 2007, and may be accessed at 1-888-284-7564 (access code 217446). Investors may also listen live via the Internet at: http://www.videonewswire.com/event.asp?id=40683.

This webcast will be archived on this site for one full year and may be accessed at any point during this time at no cost. This earnings release, including supporting financial tables, is available within the Investor Relations / News & Media section of the company's website at: http://www.communitybankna.com/.

Community Bank System, Inc. is a registered bank holding company based in DeWitt, N.Y., with $4.6 billion in assets and 140 customer facilities. Its wholly-owned banking subsidiary operates as Community Bank, N.A. across Upstate New York, and as First Liberty Bank & Trust throughout Northeastern Pennsylvania. Its other subsidiaries include: BPAS, Inc., an employee benefits firm which includes BPA-Harbridge, a provider of daily valuation and actuarial services, and Hand Benefits & Trust, a provider of Section 125, custodian and collective investment fund administration services, from offices in Upstate New York, Pittsburgh, and Houston; Community Investment Services, Inc., a broker-dealer delivering financial products throughout the company's branch network; and Nottingham Advisors, a wealth management and advisory firm with offices in Buffalo, N.Y., and North Palm Beach, Fla. For more information, please visit our websites at: http://www.communitybankna.com/ or http://www.firstlibertybank.com/.

Summary of Financial Data (Dollars in thousands, expect per share data) Quarter Ended Year-to-Date June 30, June 30, 2007 2006 2007 2006 Earnings Loan income $46,090 $39,760 $91,025 $78,088 Investment Income 17,166 16,722 33,789 33,052 Total interest income 63,256 56,482 124,814 111,140 Interest Expense 29,918 22,873 58,109 43,846 Net interest income 33,338 33,609 66,705 67,294 Provision for loan losses 414 1,725 614 3,875 Net interest income after provision for loan losses 32,924 31,884 66,091 63,419 Deposit service fees 7,825 7,063 14,802 13,672 Other banking services 444 361 1,114 837 Trust, investment and asset management fees 2,009 1,766 3,869 3,816 Benefit plan administration, consulting and actuarial fees 4,767 3,155 8,739 6,536 Investment securities gains, net (27) 0 (27) 0 Total noninterest income 15,018 12,345 28,497 24,861 Salaries and employee benefits 18,280 16,425 36,566 33,207 Professional fees 1,054 1,108 2,239 2,391 Occupancy and equipment and furniture 4,557 4,448 9,206 9,207 Amortization of intangible assets 1,581 1,489 3,096 2,982 Other 8,495 7,737 16,320 14,855 Special charges/acquisition expenses 165 1 624 1 Total operating expenses 34,132 31,208 68,051 62,643 Income before income taxes 13,810 13,021 26,537 25,637 Income taxes 3,451 3,137 6,522 6,291 Net income $10,359 $9,884 $20,015 $19,346 Basic earnings per share $0.34 $0.33 $0.66 $0.65 Diluted earnings per share $0.34 $0.33 $0.66 $0.64 Diluted earnings per share-cash (1) $0.39 $0.37 $0.75 $0.72 Summary of Financial Data (Dollars in thousands, except per share data) 2007 2006 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr Earnings Loan income $46,090 $44,935 $45,543 $43,482 $39,760 Investment Income 17,166 16,623 16,057 15,679 16,722 Total interest income 63,256 61,558 61,600 59,161 56,482 Interest Expense 29,918 28,191 27,877 25,369 22,873 Net interest income 33,338 33,367 33,723 33,792 33,609 Provision for loan losses 414 200 1,410 1,300 1,725 Net interest income after provision for loan losses 32,924 33,167 32,313 32,492 31,884 Deposit service fees 7,825 6,977 7,347 7,329 7,063 Other banking services 444 670 564 1,329 361 Trust, investment and asset management fees 2,009 1,860 1,765 1,815 1,766 Benefit plan administration, consulting and actuarial fees 4,767 3,972 3,398 3,271 3,155 Investment securities gains, net (27) 0 (2,403) 0 0 Total noninterest income 15,018 13,479 10,671 13,744 12,345 Salaries and employee benefits 18,280 18,286 17,155 16,741 16,425 Professional fees 1,054 1,185 1,083 1,119 1,108 Occupancy and equipment and furniture 4,557 4,649 4,331 4,346 4,448 Amortization of intangible assets 1,581 1,515 1,525 1,520 1,489 Other 8,495 7,825 8,134 7,960 7,737 Special charges/acquisition expenses 165 459 492 154 1 Total operating expenses 34,132 33,919 32,720 31,840 31,208 Income before income taxes 13,810 12,727 10,264 14,396 13,021 Income taxes 3,451 3,071 2,112 3,517 3,137 Net income $10,359 $9,656 $8,152 $10,879 $9,884 Basic earnings per share $0.34 $0.32 $0.27 $0.36 $0.33 Diluted earnings per share $0.34 $0.32 $0.27 $0.36 $0.33 Diluted earnings per share- cash (1) $0.39 $0.36 $0.31 $0.40 $0.37 Profitability Return on assets 0.92% 0.88% 0.73% 1.01% 0.95% Return on equity 8.92% 8.43% 6.89% 9.44% 8.76% Noninterest income/operating income (FTE) (2) 28.9% 26.6% 25.9% 26.8% 24.8% Efficiency ratio (3) 62.2% 63.1% 60.8% 58.8% 59.8% Components of Net Interest Margin (FTE) Loan yield 6.84% 6.81% 6.80% 6.77% 6.60% Investment yield 6.06% 6.11% 5.96% 5.94% 6.17% Earning asset yield 6.58% 6.58% 6.52% 6.49% 6.45% Interest-bearing deposit rate 2.96% 2.80% 2.70% 2.55% 2.38% Short-term borrowing rate 4.20% 4.16% 3.91% 4.21% 3.63% Long-term borrowing rate 5.58% 5.57% 5.80% 5.70% 5.60% Cost of all interest-bearing funds 3.47% 3.37% 3.32% 3.15% 2.96% Cost of funds (includes DDA) 2.99% 2.90% 2.84% 2.68% 2.50% Net interest margin (FTE) 3.64% 3.74% 3.74% 3.87% 4.00% Fully tax-equivalent adjustment $3,722 $3,796 $3,743 $3,764 $3,747 Summary of Financial Data (Dollars in thousands, except per share data) 2007 2006 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr Average Balances Loans $2,712,021 $2,684,566 $2,668,442 $2,558,137 $2,425,763 Taxable investment securities 885,286 843,857 797,541 776,028 803,536 Nontaxable investment securities 485,922 500,273 508,467 512,721 518,309 Total interest- earning assets 4,083,229 4,028,696 3,974,450 3,846,886 3,747,608 Total assets 4,536,348 4,469,244 4,423,468 4,272,052 4,167,403 Interest-bearing deposits 2,718,135 2,622,472 2,576,041 2,540,150 2,460,781 Short-term borrowings 154,799 159,444 160,262 125,013 127,208 Long-term borrowings 589,686 613,624 599,121 534,811 509,102 Total interest- bearing liabilities 3,462,620 3,395,540 3,335,424 3,199,974 3,097,091 Noninterest- bearing deposits 557,195 552,087 558,439 557,398 565,651 Shareholders' equity $465,652 $464,623 $469,127 $456,996 $452,408 Balance Sheet Data Cash and cash equivalents $242,410 $224,917 $232,032 $119,430 $124,453 Investment securities 1,219,491 1,317,554 1,229,271 1,250,251 1,253,202 Loans: Consumer mortgage 948,430 914,909 912,505 890,939 822,235 Business lending 988,886 957,853 960,034 953,808 827,021 Consumer installment 829,860 809,472 829,019 816,815 795,010 Total loans 2,767,176 2,682,234 2,701,558 2,661,562 2,444,266 Allowance for loan losses 36,690 35,891 36,313 35,517 32,900 Intangible assets 258,110 244,598 246,136 239,635 221,896 Other assets 132,652 125,476 125,113 137,099 128,263 Total assets 4,583,149 4,558,888 4,497,797 4,372,460 4,139,180 Deposits 3,364,577 3,278,468 3,168,299 3,138,774 3,039,038 Borrowings 577,134 626,765 647,481 628,412 512,997 Subordinated debt held by unconsolidated subsidiary trusts 127,111 127,099 158,014 80,545 80,530 Other liabilities 54,703 59,659 62,475 60,130 55,039 Total liabilities 4,123,525 4,091,991 4,036,269 3,907,861 3,687,604 Shareholders' equity 459,624 466,897 461,528 464,599 451,576 Total liabilities and share- holders' equity 4,583,149 4,558,888 4,497,797 4,372,460 4,139,180 Assets under management or administration $3,476,978 $3,296,238 $3,153,576 $2,944,725 $2,713,423 Capital Tier 1 leverage ratio 7.90% 8.29% 8.81% 7.26% 7.73% Tangible equity / tangible assets 4.66% 5.15% 5.07% 5.44% 5.86% Accumulated other comprehensive income (11,610) (3,994) (4,697) 3,798 (3,638) Diluted weighted average common shares O/S 30,396 30,547 30,454 30,334 30,308 Period end common shares outstanding 29,873 30,096 30,020 29,867 29,850 Cash dividends declared per common share $0.20 $0.20 $0.20 $0.20 $0.19 Book value 15.39 15.51 15.37 15.56 15.13 Tangible book value 6.75 7.39 7.17 7.53 7.69 Common stock price (end of period) 20.02 20.92 23.00 22.16 20.17 Summary of Financial Data (Dollars in thousands, except per share data) 2007 2006 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr Asset Quality Nonaccrual loans $9,191 $10,697 $11,382 $11,414 $10,327 Accruing loans 90+ days delinquent 779 1,914 1,207 1,133 765 Total nonperforming loans 9,970 12,611 12,589 12,547 11,092 Other real estate owned (OREO) 1,411 1,916 1,838 1,320 1,353 Total nonperforming assets 11,381 14,527 14,427 13,867 12,445 Net charge-offs 362 622 1,400 1,115 1,545 Loan loss allowance/loans outstanding 1.33% 1.34% 1.34% 1.33% 1.35% Nonperforming loans/loans outstanding 0.36% 0.47% 0.47% 0.47% 0.45% Loan loss allowance/non- performing loans 368% 285% 288% 283% 297% Net charge-offs/average loans 0.05% 0.09% 0.21% 0.17% 0.26% Delinquent loans/ending loans 0.95% 1.02% 1.33% 1.22% 1.15% Loan loss provision/net charge-offs 114% 32% 101% 117% 112% Nonperforming assets/total assets 0.25% 0.32% 0.32% 0.32% 0.30% (1) Excludes the after-tax effect of amortization of intangible assets and market value adjustment amortization on acquired loans and deposits. (2) Excludes gain (loss) on investment securities & debt extinguishment. (3) Excludes intangible amortization, acquisition expenses/special charges and gain (loss) on investment securities & debt extinguishment.

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.