-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EQzu0ophs2+TrFtEzbffYOp3FkIuOVZbxDAc6xJSp66CPaXOVXQP2LHT+o/LfLV0 Drg2RP9vHgZE9R2R/OE61Q== 0000723188-99-000011.txt : 19990816 0000723188-99-000011.hdr.sgml : 19990816 ACCESSION NUMBER: 0000723188-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC CENTRAL INDEX KEY: 0000723188 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161213679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13695 FILM NUMBER: 99689336 BUSINESS ADDRESS: STREET 1: 5790 WIDEWATERS PKWY CITY: DEWITT STATE: NY ZIP: 13214 BUSINESS PHONE: 3154452282 MAIL ADDRESS: STREET 1: 5790 WIDEWATERS PARKWAY CITY: DEWITT STATE: NY ZIP: 13214 10-Q 1 FORM 10-Q FORM 10 - Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the six months ended June 30, 1999 Commission file number 0-11716 COMMUNITY BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1213679 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5790 Widewaters Parkway, DeWitt, New York 13214 (Address of principal executive offices) (Zip Code) 315/445-2282 (Registrant's telephone number, including area code) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, No par value - 7,144,329 shares outstanding as of August 4,1999 1 INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Part I. Information Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- June 30, 1999, December 31, 1998 and June 30, 1998 Consolidated statements of income -- Three months ended June 30, 1999 and 1998 and six months ended June 30, 1999 and 1998 Consolidated statements of cash flows -- Six months ended June 30, 1999, and 1998 Consolidated statements of comprehensive income -- Six months ended June 30, 1999 and 1998 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 2 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION
June 30, December 31, June 30, 1999 1998 1998 ASSETS Cash and due from banks $71,541,129 $78,893,438 $74,838,323 Federal funds sold 0 0 0 - ------------------------------------------------------------------------------------------------------------------ TOTAL CASH AND CASH EQUIVALENTS 71,541,129 78,893,438 74,838,323 Investment securities U.S. Treasury 2,997,545 2,994,897 2,993,295 U.S. Government agencies and corporations 169,370,833 167,469,638 225,660,514 States and political subdivisions 119,679,787 44,628,567 32,195,257 Mortgage-backed securities 285,598,475 336,090,432 342,174,140 Federal Reserve Bank 2,173,950 2,173,950 2,173,950 Other securities 59,848,052 32,936,733 26,849,434 ------------------------------------------ Investment securities at cost 639,668,642 586,294,217 632,046,590 Market value adjustment on available for sale (5,456,843) 7,245,550 4,046,781 - ------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT SECURITIES 634,211,799 593,539,767 636,093,371 Loans 943,368,566 918,527,226 896,046,139 Less: Unearned discount 988,707 1,307,106 1,793,865 Reserve for possible loan losses 13,054,953 12,441,255 12,441,255 - ------------------------------------------------------------------------------------------------------------------ NET LOANS 929,324,906 904,778,865 881,811,019 Bank premises and equipment 24,290,945 24,877,782 24,250,853 Accrued interest receivable 13,702,971 12,375,334 13,430,391 Intangible assets 52,298,984 54,438,219 56,340,078 Other assets 15,800,945 11,785,296 12,531,438 - ------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,741,171,679 $1,680,688,701 $1,699,295,473 ================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $230,125,169 $249,863,649 $218,792,422 Interest bearing 1,141,670,556 1,128,201,929 1,197,598,613 - ------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 1,371,795,725 1,378,065,578 1,416,391,035 Federal funds purchased 37,200,000 34,700,000 7,500,000 Term borrowings 170,000,000 100,000,000 105,000,000 Company obligated mandatorily redeemable preferred securities of subsidiary, Community Capital Trust I holding solely junior subordinated debentures of the company 29,813,813 29,810,438 29,807,063 Accrued interest and other liabilities 19,067,897 17,947,217 17,927,532 - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 1,627,877,435 1,560,523,233 1,576,625,630 - ------------------------------------------------------------------------------------------------------------------ Shareholders' equity: Common stock (7,144,329;7,296,453;7,622,291 7,639,429 7,623,053 7,622,291 shares outstanding) Surplus 33,245,970 32,842,772 32,833,532 Undivided profits 89,000,344 84,591,247 79,880,254 Accumulated other comprehensive income (3,227,722) 4,285,743 2,393,671 Treasury stock (495,100; 326,000 shares) (13,343,994) (9,151,956) 0 Shares issued under employee stock plan - unearned (19,783) (25,391) (59,905) - ------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 113,294,244 120,165,468 122,669,843 - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,741,171,679 $1,680,688,701 $1,699,295,473 ================================================================================================================== See notes to consolidated financial statements.
3 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------- Interest Income: Interest and fees on loans $20,621,342 $20,547,747 $40,870,521 $40,386,850 Interest and dividends on investments: U.S. Treasury 67,653 67,168 135,209 134,117 U.S. Government agencies and corporations 2,833,997 4,329,725 6,054,324 8,885,570 States and political subdivisions 1,291,353 354,494 2,116,436 644,740 Mortgage-backed securities 4,174,779 5,264,685 8,251,758 10,850,436 Other securities 898,838 556,897 1,440,036 1,040,961 Interest on federal funds sold 3,681 97,001 3,681 164,530 Interest on deposits at other banks 664 503 1,085 995 - -------------------------------------------------------------------------------------------------- Total interest income 29,892,307 31,218,220 58,873,050 62,108,199 - -------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits Savings 2,822,912 3,188,977 5,587,828 6,316,588 Time 7,884,994 9,740,897 15,790,175 19,052,821 Interest on federal funds purchased and term borrowings 1,932,119 1,633,360 3,638,097 3,182,345 Interest on mandatorily redeemable capital securities of subsidiary 732,938 732,937 1,465,875 1,465,875 - -------------------------------------------------------------------------------------------------- Total interest expense 13,372,963 15,296,171 26,481,975 30,017,629 - -------------------------------------------------------------------------------------------------- Net interest income 16,519,344 15,922,049 32,391,075 32,090,570 Less: Provision for possible loan losses 1,421,358 1,303,078 2,589,962 2,674,078 - -------------------------------------------------------------------------------------------------- Net Interest income after provision for loan losses 15,097,986 14,618,971 29,801,113 29,416,492 - -------------------------------------------------------------------------------------------------- Other income: Fiduciary and investment services 552,782 474,769 1,250,836 945,292 Service charges on deposit accounts 1,736,655 1,628,261 3,316,043 3,025,962 Commissions on investment products 300,372 348,006 624,285 598,429 Other service charges, commissions and fees 1,216,276 1,072,360 2,248,789 2,049,532 Miscellaneous income 73,881 159,697 266,576 481,068 Investment security gains (losses) 0 999,383 276,642 1,265,528 - -------------------------------------------------------------------------------------------------- Total other income 3,879,966 4,682,476 7,983,171 8,365,811 - -------------------------------------------------------------------------------------------------- Other expenses: Salaries and employee benefits 6,493,342 6,542,199 13,078,547 12,985,917 Occupancy expense, net 987,313 1,003,655 2,044,949 2,074,727 Equipment and furniture expense 902,947 814,640 1,798,723 1,616,482 Amortization of intangible assets 1,155,512 1,162,813 2,313,435 2,331,677 Other 3,648,880 3,642,479 7,171,430 6,821,123 - -------------------------------------------------------------------------------------------------- Total other expenses 13,187,994 13,165,786 26,407,084 25,829,926 - -------------------------------------------------------------------------------------------------- Income before income taxes 5,789,958 6,135,661 11,377,200 11,952,377 Income taxes 1,741,517 2,233,618 3,640,704 4,362,618 - -------------------------------------------------------------------------------------------------- NET INCOME $4,048,441 $3,902,043 $7,736,496 $7,589,759 ================================================================================================== Earnings per share - Basic $0.56 $0.51 $1.07 $1.00 - Diluted $0.55 $0.50 $1.05 $0.98 ================================================================================================== See notes to consolidated financial statements.
4 COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
For Six Months Ended June 30, 1999 and 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 7,736,496 $ 7,589,759 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,484,945 1,369,515 Amortization of intangible assets 2,313,435 2,331,677 Net amortization of security premiums and discounts 2,895,258 2,899,617 Amortization of discount on loans (318,399) 0 Provision for loan losses 2,589,962 2,674,078 Provision for deferred taxes 1,680,043 8,425 (Gain)\loss on sale of investment securities (276,642) (1,265,528) (Gain)\loss on sale of loans and other assets 1,978 (165,325) Change in interest receivable (1,327,637) (37,573) Change in other assets and other liabilities 884,481 3,707,124 Change in unearned loan fees and costs (640,040) (641,743) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,023,880 18,470,026 - ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 4,616,500 42,658,104 Proceeds from maturities of held to maturity investment securities 1,203,972 30,639,566 Proceeds from maturities of available for sale investment securities 122,569,076 31,946,353 Purchases of held to maturity investment securities (2,014,617) (4,832,223) Purchases of available for sale investment securities (182,367,972) (126,910,523) Net change in loans outstanding (26,142,590) (52,982,452) Capital expenditures (958,399) (1,888,621) Proceeds from sales of property and equipment 23,339 0 Other investing activities (174,200) 0 - ---------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (83,244,891) (81,369,796) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts (1,881,198) 34,542,937 Net change in certificates of deposit (4,388,655) 36,162,140 Net change in federal funds purchased 2,500,000 (37,500,000) Net change in term borrowings 70,000,000 25,000,000 Issuance (retirement) of common and preferred stock 179,228 464,449 Treasury stock purchased (4,192,038) 0 Cash dividends (3,348,635) (3,037,836) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 58,868,702 55,631,690 - ---------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (7,352,309) (7,268,080) Cash and cash equivalents at beginning of year 78,893,438 82,106,403 - ---------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 71,541,129 74,838,323 ====================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 26,050,957 $ 26,038,492 ====================================================================================================================== Cash paid for income taxes $ 1,960,661 $ 3,488,238 ====================================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $ 3,327,399 $ 1,524,458 Gross change in unrealized gains and (losses) on available-for-sale securities ($ 12,702,393) ($ 663,241) ====================================================================================================================== The accompanying notes are an integral part of the consolidated financial statements.
5 COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For Six Months Ended June 30, 1999 and 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), before tax: Unrealized gains on securities: Change in unrealized holding gains (losses) arising during period $ (12,425,752) $ 614,231 Less: Reclassification adjustment for gains included in net income (276,642) (1,265,528) - ------------------------------------------------------------------------------------------------------------------ Other comprehensive loss, before tax (12,702,394) (651,297) Income tax benefit related to items of other comprehensive income 5,188,928 266,055 - ------------------------------------------------------------------------------------------------------------------ Other comprehensive loss, net of tax (7,513,466) (385,242) Plus: Net income 7,736,496 7,589,759 - ------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 223,030 $ 7,204,517 ==================================================================================================================
See notes to consolidated financial statements 6 Community Bank System, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 Note A -- Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. On January 29, 1997, Community Bank System, Inc. formed a wholly-owned subsidiary, Community Capital Trust I, a Delaware statutory business trust. The Trust has issued $30 million aggregate liquidation amount of 9.75% Company-Obligated Mandatorily Redeemable Preferred Securities representing undivided beneficial interests in the assets of the Trust. The Company borrowed the proceeds of the Preferred Securities from the Trust by issuing Junior Subordinated Debentures to the Trust having substantially similar terms as the Preferred Securities. The sole assets of the Trust on June 30, 1999 were $31,998,262 aggregate principal amount of the Company's Junior Subordinated Debentures, together with the related accrued interest receivable thereon. The Preferred Securities mature in 2027, and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The guarantees issued by the Company for the Trust, together with the Company's obligations under the Trust Agreement, the Junior Subordinated Debentures and the Indenture under which the Junior Subordinated Debentures were issued, constitute a full and unconditional guarantee by the Company of the Preferred Securities issued by the Trust. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement requires the Company to report the effects of unrealized investment holding gains or losses on comprehensive income as displayed in the Statement of Comprehensive Income. Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company elected to reclassify $212,735,000 of its held-to-maturity securities as available-for-sale upon adoption of FAS 133. 7 Note B -- Earnings Per Share Basic earnings per share is computed based on the weighted average shares outstanding. Diluted earnings per share is computed based on the weighted average shares outstanding adjusted for the dilutive effect of the assumed exercise of stock options during the year. The following is a reconciliation of basic to diluted earnings per share for the six and three months ended June 30, 1999 and 1998: - -------------------------------------------------------------------------------- For six months ended Jun 30, 1999 Income Shares Per share amount - -------------------------------------------------------------------------------- Net Income 7,736,496 Basic EPS 7,736,496 7,251,787 $ 1.07 Effect of diluted securities: Stock options 0 83,288 ---------------------- DILUTED EPS $7,736,496 7,335,075 $ 1.05 ================================================================================ - -------------------------------------------------------------------------------- For six months ended June 30, 1998 Income Shares Per share amount - -------------------------------------------------------------------------------- Net Income 7,589,755 Basic EPS 7,589,755 7,607,082 $ 1.00 Effect of diluted securities: 0 144,036 Stock options ---------------------- DILUTED EPS $7,589,755 7,751,118 $ 0.98 ================================================================================ - -------------------------------------------------------------------------------- For three months ended June 30, 1999 Income Shares Per share amount - -------------------------------------------------------------------------------- Net Income 4,048,441 Basic EPS 4,048,441 7,240,346 $ 0.56 Effect of diluted securities: 0 81,223 Stock options ---------------------- DILUTED EPS $4,048,441 7,321,569 $ 0.55 ================================================================================ - -------------------------------------------------------------------------------- For three months ended June 30, 1998 Income Shares Per share amount - -------------------------------------------------------------------------------- Net Income 3,902,043 Basic EPS 3,902,043 7,616,011 $ 0.51 Effect of diluted securities: 0 143,420 Stock options ---------------------- DILUTED EPS $3,902,043 7,759,431 $ 0.50 ================================================================================ 8 Part 1. Financial Information Item 1. Financial Statements The information required by rule 10.01 of Regulation S-X is presented on the previous pages. Item 2. Management's Discussion and Analysis of Financial Condition and of Operations The purpose of the discussion is to present material changes in Community Bank System, Inc.'s financial condition and results of operations during the six months ended June 30, 1999 which are not otherwise apparent from the consolidated financial statements included in these reports. When used in this report, the term "CBSI" means Community Bank System, Inc. and its subsidiaries on a consolidated basis, unless indicated otherwise. Financial performance comparisons to peer bank holding companies are based on data through March 31, 1999 as provided by the Federal Reserve System; the peer group is comprised of 152 bank holding companies having $1 to $3 billion in assets. 9 COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 2ND QUARTER 1999 AND FULL YEAR COMPARISONS 000s Omitted Three Months Ended June 30, Line ========= Change Change No. Earnings 1999 1998 Amount Percent ========= ========= ========= ======== ========= 1 Net interest income $16,519 $15,922 $597 3.7% 2 Loan loss provision 1,421 1,303 118 9.1% 3 Net interest income after provision for loan losses 15,098 14,619 479 3.3% 4 Investment security gain (loss) 0 1,000 (1,000) --- 5 Other income 3,880 3,683 197 5.3% 6 Other expense 12,033 12,003 30 0.2% 7 Intangible amortization 1,155 1,163 (8) -0.7% 8 Income before tax 5,790 6,136 (346) -5.6% 9a Income tax 1,742 2,234 (492) -22.0% 10 Net income $4,048 $3,902 $146 3.7% Earnings per share 11a Basic $0.56 $0.51 $0.05 9.8% 11b Diluted $0.55 $0.50 $0.05 10.0% ======= ======= ======= ======= ------------------------ Balances At Period End ------------------------ 12 Loans $942,380 $894,252 $48,128 5.4% 13 Investments (excl. mkt val adj) 639,669 632,047 7,622 1.2% 14 Earning assets 1,582,114 1,526,334 55,780 3.7% 15 Loan loss reserve 13,055 12,441 614 4.9% 16 Intangible assets 52,299 56,340 (4,041) -7.2% 17 Total assets 1,741,172 1,699,295 41,876 2.5% 18 Deposits 1,371,796 1,416,391 (44,595) -3.1% 19 Borrowings 237,014 142,307 94,707 66.6% 20 Total equity $113,294 $122,670 ($9,376) -7.6% 10a 000s Omitted Six Months Ended June 30, Line ========= Change Change No. Earnings 1999 1998 Amount Percent ========= ========= ========= ======== ========= 1 Net interest income $32,391 $32,091 $300 0.9% 2 Loan loss provision 2,590 2,674 (84) -3.1% 3 Net interest income after provision for loan losses 29,801 29,417 384 1.3% 4 Investment security gain (loss) 277 1,266 (989) --- 5 Other income 7,706 7,100 606 8.5% 6 Other expense 24,094 23,498 596 2.5% 7 Intangible amortization 2,313 2,332 (19) -0.8% 8 Income before tax 11,377 11,953 (576) -4.8% 9 Income tax 3,641 4,363 (722) -16.6% 10 Net income $7,736 $7,590 $146 1.9% Earnings per share 11a Basic $1.07 $1.00 $0.07 7.0% 11b Diluted $1.05 $0.98 $0.07 7.1% ======= ======= ======= ======= ------------------------ Balances At Period End ------------------------ 12 Loans $942,380 $894,252 $48,128 5.4% 13 Investments (excl. mkt val adj) 639,669 632,047 7,622 1.2% 14 Earning assets 1,582,114 1,526,334 55,780 3.7% 15 Loan loss reserve 13,055 12,441 614 4.9% 16 Intangible assets 52,299 56,340 (4,041) -7.2% 17 Total assets 1,741,172 1,699,295 41,876 2.5% 18 Deposits 1,371,796 1,416,391 (44,595) -3.1% 19 Borrowings 237,014 142,307 94,707 66.6% 20 Total equity $113,294 $122,670 ($9,376) -7.6% 10b 000s Omitted Three Months Ended, Line Jun 30, Mar 31, Change Change No. Earnings 1999 1999 Amount Percent ========= ========= ========= ======== ========= 1 Net interest income $16,519 $15,872 $647 4.1% 2 Loan loss provision 1,421 1,169 252 21.6% 3 Net interest income after provision for loan losses 15,098 14,703 395 2.7% 4 Investment security gain (loss) 0 277 (277) --- 5 Other income 3,880 3,826 54 1.4% 6 Other expense 12,033 12,061 (28) -0.2% 7 Intangible amortization 1,155 1,158 (3) -0.3% 8 Income before tax 5,790 5,587 203 3.6% 9 Income tax 1,742 1,899 (157) -8.3% 10 Net income $4,048 $3,688 $360 9.8% Earnings per share 11a Basic $0.56 $0.51 $0.05 9.8% 11b Diluted $0.55 $0.50 $0.05 10.0% ======= ======= ======= ======= ------------------------ Balances At Period End ------------------------ 12 Loans $942,380 $916,904 $25,476 2.8% 13 Investments 639,669 593,481 46,188 7.8% (excl. mkt val adj) 14 Earning assets 1,582,114 1,510,445 71,669 4.7% 15 Loan loss reserve 13,055 12,594 461 3.7% 16 Intangible assets 52,299 53,374 (1,075) -2.0% 17 Total assets 1,741,172 1,658,898 82,274 5.0% 18 Deposits 1,371,796 1,369,912 1,884 0.1% 19 Borrowings 237,014 151,012 86,002 57.0% 20 Total equity $113,294 $120,518 ($7,224) -6.0% 10c COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 2ND QUARTER 1999 AND FULL YEAR COMPARISONS 000s Omitted Three Months Ended June 30, Line No. Change Change Profitability 1999 1998 Amount Percent =============== ========= ========= ======== ========= 21 Return on assets 0.96% 0.93% 0.03 %pts.--- 22 Return on equity 13.66% 13.06% 0.60 %pts.--- 23 Cash EPS (diluted) $0.65 $0.59 $0.06 10.2% 24 Tangible return on assets 1.12% 1.09% 0.03 %pts.--- 25 Tangible return on equity 15.96% 15.34% 0.62 %pts.--- 26 Net interest margin 4.48% 4.19% 0.29 %pts.--- 27 Non interest income/ 18.5% 18.8% (0.3)%pts.--- operating income (excl sec gains) 28 Efficiency ratio 56.8% 60.6% (3.8)%pts.--- (excl one time items and) intangible amortization) --------- Capital --------- 29 Tier I leverage ratio 5.71% 5.75% (0.04)%pts.--- Common shares outstanding 30a Weighted average 7,322 7,759 (437) -5.6% 30b Period end 7,144 7,622 (478) -6.3% 31 Cash dividends declared $0.23 $0.20 $0.03 15.0% per common share 32 Common stock price $25.38 $31.31 ($5.94) -19.0% 33a Book value $15.86 $16.09 ($0.23) -1.4% 33b Tangible book value $8.54 $8.70 ($0.16) -1.9% ---------------------- Asset Quality Ratios ---------------------- 34 Loan loss reserve / loans outstanding 1.39% 1.39% (0.00)%pts.--- 35 Nonperforming loans / loans outstanding 0.50% 0.45% 0.05 %pts.--- 36 Loan loss reserve / nonperforming loans 278% 308% (30)%pts.--- 37 Net charge-offs / average loans 0.41% 0.59% (0.18)%pts.--- 38 Loan loss provision / net charge-offs 148% 100% 48 %pts.--- 39 Nonperforming assets / loans outstanding+OREO 0.60% 0.56% 0.04 %pts.--- 11a 000s Omitted Six Months Ended June 30, Line No. Change Change Profitability 1999 1998 Amount Percent =============== ========= ========= ======== ========= 21 Return on assets 0.93% 0.92% 0.01 %pts.--- 22 Return on equity 13.01% 12.80% 0.21 %pts.--- 23 Cash EPS (diluted) $1.24 $1.16 $0.08 7.0% 24 Tangible return on assets 1.09% 1.08% 0.01 %pts.--- 25 Tangible return on equity 15.31% 15.12% 0.19 %pts.--- 26 Net interest margin 4.43% 4.31% 0.12 %pts.--- 27 Non interest income/ 18.8% 18.1% 0.7 %pts.--- operating income (excl sec gains) 28 Efficiency ratio 57.9% 59.4% (1.5)%pts.--- (excl one time items and) intangible amortization) --------- Capital --------- 29 Tier I leverage ratio 5.71% 5.75% (0.04)%pts.--- Common shares outstanding 30a Weighted average 7,335 7,751 (416) -5.4% 30b Period end 7,144 7,622 (478) -6.3% 31 Cash dividends declared $0.46 $0.40 $0.06 15.0% per common share 32 Common stock price $25.38 $31.31 ($5.94) -19.0% 33a Book value $15.86 $16.09 ($0.23) -1.4% 33b Tangible book value $8.54 $8.70 ($0.16) -1.9% ---------------------- Asset Quality Ratios ---------------------- 34 Loan loss reserve / loans outstanding 1.39% 1.39% (0.00)%pts.--- 35 Nonperforming loans / loans outstanding 0.50% 0.45% 0.05 %pts.--- 36 Loan loss reserve / nonperforming loans 278% 308% (30)%pts.--- 37 Net charge-offs / average loans 0.43% 0.62% (0.19)%pts.--- 38 Loan loss provision / net charge-offs 131% 100% 31 %pts.--- 39 Nonperforming assets / loans outstanding+OREO 0.60% 0.56% 0.04 %pts.--- 11b 000s Omitted Line Three Months Ended, No. Jun 30, Mar 31, Change Change Profitability 1999 1999 Amount Percent =============== ========= ========= ======== ========= 21 Return on assets 0.96% 0.90% 0.06 %pts.--- 22 Return on equity 13.66% 12.36% 1.30 %pts.--- 23 Cash EPS (diluted) $0.65 $0.59 $0.06 9.5% 24 Tangible return on assets 1.12% 1.06% 0.06 %pts.--- 25 Tangible return on equity 15.96% 14.66% 1.30 %pts.--- 26 Net interest margin 4.48% 4.38% 0.10 %pts.--- 27 Non interest income/ 18.5% 19.0% (0.5)%pts.--- operating income (excl sec gains) 28 Efficiency ratio 56.8% 59.0% (2.2)%pts.--- (excl one time items and) intangible amortization) --------- Capital --------- 29 Tier I leverage ratio 5.71% 5.81% (0.10)%pts.--- Common shares outstanding 30a Weighted average 7,322 7,384 (62) -0.8% 30b Period end 7,144 7,263 (119) -1.6% 31 Cash dividends declared $0.23 $0.23 $0.00 0.0% per common share 32 Common stock price $25.38 $23.81 $1.57 6.6% 33a Book value $15.86 $16.59 ($0.73) -4.4% 33b Tangible book value $8.54 $9.24 ($0.70) -7.6% ---------------------- Asset Quality Ratios ---------------------- 34 Loan loss reserve / loans outstanding 1.39% 1.37% 0.02 %pts.--- 35 Nonperforming loans / loans outstanding 0.50% 0.49% 0.01 %pts.--- 36 Loan loss reserve / nonperforming loans 278% 282% (4)%pts.--- 37 Net charge-offs / average loans 0.41% 0.45% (0.04)%pts.--- 38 Loan loss provision / net charge-offs 148% 115% 33 %pts.--- 39 Nonperforming assets / loans outstanding+OREO 0.60% 0.60% 0.00 %pts.--- 11c COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 2ND QUARTER 1999 AND FULL YEAR COMPARISONS 000s Omitted Three Months Ended June 30, Line No. Change Change Asset Quality Components 1999 1998 Amount Percent ========================= ========= ========= ======== ========= 40 Nonaccruing loans $3,515 $2,693 $822 30.5% 41 90+ days delinquent 1,189 1,350 -161 -11.9% 42 Tot nonperforming loans $4,704 $4,043 $661 16.3% 43 Troubled debt 123 126 -3 --- restructurings 44 Other real estate 853 975 -122 -12.5% 45 Tot nonperforming assets $5,680 $5,144 $536 10.4% -------------------------------------- Components of Net Interest Margin -------------------------------------- 46 Loan yield 8.90% 9.39% (0.49)%pts.--- 47 Investment yield 6.55% 6.58% (0.03)%pts.--- 48 Earning asset yield 7.97% 8.19% (0.22)%pts.--- 49 Interest bearing deposits rate 3.76% 4.31% (0.56)%pts.--- 50 Borrowed funds rate 6.08% 6.64% (0.56)%pts.--- 51 Cost of all interest 4.07% 4.56% (0.49)%pts.--- bearing funds 52 Cost of funds 3.45% 3.95% (0.50)%pts.--- (includes DDA) 53 Cost of funds / earning 3.50% 3.99% (0.49)%pts.--- assets 54 Net interest margin 4.48% 4.19% 0.29 %pts.--- 55 Full tax equivalent adj. $575 $166 $409 246.4% --------------------------------- Average Balances for Period --------------------------------- 56 Loans $929,770 $877,616 $52,154 5.9% 57 Investments (excl. mkt val adj) 602,596 660,097 (57,501) -8.7% 58 Earning assets 1,532,366 1,537,713 (5,347) -0.3% 59 Total assets 1,693,361 1,691,816 1,545 0.1% 60 Deposits 1,377,975 1,410,726 (32,751) -2.3% 61 Borrowings 175,824 142,969 32,855 23.0% 62 Total equity $118,894 $119,865 ($971) -0.8% 12a Six Months Ended June 30, Line No. Change Change Asset Quality Components 1999 1998 Amount Percent ========================= ========= ========= ======== ========= 40 Nonaccruing loans $3,515 $2,693 $822 30.5% 41 90+ days delinquent 1,189 1,350 -161 -11.9% 42 Tot nonperforming loans $4,704 $4,043 $661 16.3% 43 Troubled debt restructurings 123 126 -3 --- restructurings 44 Other real estate 853 975 -122 -12.5% 45 Tot nonperforming assets $5,680 $5,144 $536 10.4% -------------------------------------- Components of Net Interest Margin -------------------------------------- 46 Loan yield 8.93% 9.43% (0.50)%pts. --- 47 Investment yield 6.41% 6.84% (0.43)%pts. --- 48 Earning asset yield 7.94% 8.32% (0.38)%pts. --- 49 Interest bearing deposits rate 3.78% 4.31% (0.53)%pts. --- 50 Borrowed funds rate 6.11% 6.71% (0.59)%pts. --- 51 Cost of all interest 4.08% 4.56% (0.48)%pts. --- bearing funds 52 Cost of funds 3.47% 3.95% (0.48)%pts. --- (includes DDA) 53 Cost of funds / earning 3.51% 4.00% (0.49)%pts. --- assets 54 Net interest margin 4.43% 4.31% 0.12 %pts. --- 55 Full tax equivalent adj. $964 $302 $662 219.2% --------------------------------- Average Balances for Period --------------------------------- 56 Loans $922,836 $863,492 $59,344 6.9% 57 Investments (excl. mkt val adj) 596,616 649,080 (52,464) -8.1% 58 Earning assets 1,519,452 1,512,572 6,880 0.5% 59 Total assets 1,681,270 1,670,522 10,748 0.6% 60 Deposits 1,372,204 1,393,620 (21,416) -1.5% 61 Borrowings 168,377 139,803 28,574 20.4% 62 Total equity $119,934 $119,589 $345 0.3% 12b Three Months Ended, Line No. Jun 30, Mar 31, Change Change Asset Quality Components 1999 1999 Amount Percent ========================= ========= ========= ======== ========= 40 Nonaccruing loans $3,515 $2,751 $764 27.8% 41 90+ days delinquent 1,189 1,709 -520 -30.4% 42 Tot nonperforming loans $4,704 $4,460 $244 5.5% 43 Troubled debt restructurings 123 156 -33 -21.2% restructurings 44 Other real estate 853 935 -82 -8.8% 45 Tot nonperforming assets $5,680 $5,551 $129 2.3% -------------------------------------- Components of Net Interest Margin -------------------------------------- 46 Loan yield 8.90% 8.97% (0.07)%pts.--- 47 Investment yield 6.55% 6.26% 0.29 %pts.--- 48 Earning asset yield 7.97% 7.91% 0.06 %pts.--- 49 Interest bearing deposits rate 3.76% 3.80% (0.04)%pts.--- 50 Borrowed funds rate 6.08% 6.15% (0.07)%pts.--- 51 Cost of all interest 4.07% 4.09% (0.02)%pts.--- bearing funds 52 Cost of funds 3.45% 3.48% (0.03)%pts.--- (includes DDA) 53 Cost of funds / earning 3.50% 3.53% (0.03)%pts.--- assets 54 Net interest margin 4.48% 4.38% 0.10 %pts.--- 55 Full tax equivalent adj $575 $389 $186 47.8% --------------------------------- Average Balances for Period --------------------------------- 56 Loans $929,770 $915,828 $13,942 1.5% 57 Investments (excl. mkt val adj) 602,596 590,570 12,026 2.0% 58 Earning assets 1,532,366 1,506,395 25,971 1.7% 59 Total assets 1,693,361 1,669,044 24,317 1.5% 60 Deposits 1,377,975 1,366,368 11,607 0.8% 61 Borrowings 175,824 160,846 14,978 9.3% 62 Total equity $118,894 $120,986 ($2,092) -1.7% 12c Earnings per share (diluted) for second quarter 1999 reached $.55, a record high for any second quarter and up 10% over the prior year; for the six month period, earnings per share rose 7.1%. Net income for the quarter and first half was $4.048 million and $7.736 million, up 3.7% and 1.9%, respectively. The greater improvement in earnings per share reflects fewer average shares outstanding as a result of the Company's share repurchase program. Since its inception last fall, over 495,000 shares or 6.5% of shares outstanding have been bought back, including 118,500 during the second quarter. Compared to first quarter 1999 results, earnings per share (diluted) were $.05 or 10% higher while net income was up $360,000 or 9.8%. Cash earnings per share (diluted) for the quarter increased to $.65, up 10.2% compared to last year. Cash or tangible return on assets (ROA) was 1.12% versus nominal ROA at .96%. And tangible return on equity (ROE) for the quarter rose 62 basis points over one year earlier to 15.96%, exceeding nominal ROE by 2.30 percentage points for the same period. The difference between cash and nominal results reflects the contribution of the Company's branch acquisitions on an economic basis, which excludes the non-cash impact of amortizing the premiums paid for the acquisitions. The Company's record high results for any second quarter reflect a combination of continued improvement in net interest margin to 4.48% from its low of one year ago (up nearly 30 basis points), resumption of loan growth from being unchanged during the first quarter (up 2.8% since March 31, 1999), expansion of the Bank's investment portfolio to take advantage of better buying opportunities as the yield curve steepens (up 7.8% during the quarter to being slightly higher than in mid 1998), increased noninterest income (up 5.3% from second quarter last year), careful management of overhead (virtually unchanged from four quarters earlier), and improved tax planning (reflected in a 4.5 percentage point reduction in the year-to-date effective tax rate). No securities gains were realized this quarter compared to one year ago when $1.0 million was recognized as part of managing our investment portfolio on a total return basis in that interest rate environment. Particularly important to the Company's results is that net interest income (full tax equivalent) achieved its highest level since fourth quarter 1997, having improved for the second consecutive quarter to $17.1 million from the 1998 quarterly low in the fourth quarter of $16.0 million. Part of the reason for the improvement was a 10 basis point increase in the net interest margin during the last three months to 4.48%. This reflects a better yield on the Company's investment portfolio due to the impact of reduced principle prepayments on the Company's collateralized mortgage obligation (CMO) securities; in addition, there was a further 3 basis point reduction in our overall cost of funds due largely to downward pricing on selected time deposit maturities, a trend which began in second quarter 1998. Greater earning asset growth was also important to improved performance, rising $71.7 million since March 31, 1999 versus $6.9 million during the first quarter. Growth in the investment portfolio contributed nearly two-thirds of this most recent increase. Second quarter noninterest income (excluding net securities gains/losses) rose 5.3% from one year earlier to $3.9 million, with virtually all of the increase being related to general banking fees (overdraft fees, deposit service charges, and miscellaneous commissions), which rose over 12%. Financial services income was unchanged: Personal trust fees and fees from the Company's EBT/BPA business, which provides investment management, pension administration and consulting services, were up modestly, but an offsetting reduction occurred in mutual fund commissions largely due to a lag caused by an operations conversion to the Company's own broker/dealer operation. For the first six months, financial services income rose $292,000 or 12.5% while general banking fees climbed $529,000 or 12.3%. Miscellaneous income, which consists of various periodic items, was moderately lower year-to-date due to fewer transactions, such as the absence of an insurance claim and gain on life insurance received last year in the second and first quarter, respectively. Noninterest income, excluding transactions related to investment securities and disposal of branch properties, as a percent of operating income rose to 18.8% in the first six months of 1999 compared to 18.1% one year earlier. 13 Loans rose $25.5 million during the quarter to $942.4 million, the strongest performance since the $38.7 million increase in last year's second quarter and in sharp comparison to the first quarter's $316,000 decrease. During the last twelve months, loans have grown by $48.1 million or 5.4%; in addition, $48.8 million in mortgages has been originated and sold in the secondary market, resulting in total managed loan growth of 10.8%. Nearly half the growth in loans outstanding during the second quarter was in commercial loans at $12.6 million, well in excess of the increases in the preceding three periods. Consumer mortgages and indirect installment loans rose about equally, accounting for 21% ($5.2 million) and 23% ($5.9 million), respectively, of the quarter's growth. Both categories reflected a seasonal pick-up from the first quarter, with indirect loans (nearly all financing new and used automobiles) showing their first net increase in one year. While showing a relatively modest increase at $1.8 million, consumer direct loans (including home equity loans) rose for the first time since the Company's mid-1997 branch acquisitions. In recognition of rising interest rates, origination and sale of mortgages in the secondary market were $8.8 million for the quarter, less than half the first quarter 1999 level and $2.2 million less than in second quarter 1998. Nonperforming loans ended the quarter at $4.7 million or .50% of loans outstanding, up $661,000 and .05%, respectively, from one year earlier. Based on the most recent peer bank data as of March 31, 1999, when the Company's nonperforming loan ratio was .49%, the comparable peer bank ratio was .74%, ranking CBSI in the favorable 37th percentile. Compared to year-end 1998, nonperformers have risen by nearly $720,000 or 18%. This change is more than accounted for by two borrowers having combined outstandings of nearly $900,000; one loan has a partial Small Business Administration guarantee and the other is a defaulted automobile dealer floor plan identified in early June now under criminal investigation. Charge-offs estimated at approximately $275,000 are expected to be recognized in the third quarter when the necessary details are clarified. In the meantime, a specific loan loss provision of $317,000 was established in the current quarter in anticipation of this determination. The ratio of loan loss reserves to loans outstanding increased slightly during the quarter to 1.39%, resulting in coverage over nonperformers at 278%, a level which management believes to be adequate. The ratio of delinquencies (30 days or more) and nonaccruals to total loans ended the quarter at 1.52%, up from 1.40% at year-end 1998 and 1.36% one year ago, but well within the Company's internal guideline of 2.0%. Loan loss provision expense increased to $1.4 million for the second quarter, $118,000 above the same period last year and $252,000 more than for the first three months of this year. This increase is entirely due to the provision for charge-offs anticipated in the third quarter on the two commercial customers discussed above. Net charge-offs on installment loans have continued to steadily improve both absolutely, down $728,000 or 31% for the first six months of 1999 versus 1998, and as a percentage of installment loans outstanding, averaging almost one half point lower at 1.08%. Combined net charge-offs on residential and commercial mortgages remain essentially unchanged for the two periods at approximately .03% of outstandings. Total second quarter net charge-offs as a percent of average loans were .41%. The second quarter provision covered actual net charge-offs by 1.48 times; when the anticipated charge-offs on the two above commercial loans are considered, coverage is 1.15 times. Coverage in excess of charge-offs is being taken in 1999 as a precaution is the event the Upstate New York economy weakens after its long sustained period of relative economic health. The Company's second quarter 1999 efficiency ratio (recurring overhead less intangible amortization compared to net interest plus recurring other income) improved to 56.8% from 60.6% one year earlier and 59.0% in the first quarter. This favorable trend is a function of several factors: an increase in net interest margin due to a lower cost of funds and reduced premium amortization on the Company's CMO securities, growth in earning assets, steady progress in developing more sources of noninterest income, and persistent control of overhead expense. Second quarter overhead was virtually unchanged from one year earlier and from first quarter 1999 levels. For the first six months, overhead rose $577,000 or 2.2%; overhead rose .6% after excluding branch disposal expenses of $322,000 this year versus none in 1998 and $96,000 in write-offs of fraudulent installment loans related to the defaulted dealer floor plan noted above. 14 Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather the four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. Based on its assessment, the Company determined that the majority of its processing systems are outsourced to industry standard vendors. The Company, through its Year 2000 Committee, has identified critical vendors and processes and have put in place monitoring and measuring techniques to assure its critical vendors are complying with the Federal Financial Institutions Examining Council guidelines for Year 2000 compliance. In brief, the Company's loan, deposit and general ledger systems are outsourced to Fiserv, Inc.; the investment accounting is outsourced to First Tennessee Bank; ATM processing is outsourced to U. S. Bank Network Services; and the trust account system employs Sungard software. The Company is subject to quarterly reviews by the Office of the Comptroller of the Currency (OCC), including year 2000 compliance. The Company presently believes that with the modifications to existing software and the conversions to new software that have been completed, the year 2000 issue has been mitigated without impact on the Company's operations. The Company has completed formal communications with all of its significant suppliers and large customers to determine the status of Year 2000 compliance and if appropriate contingency plans and business resumption plans are in place in the unlikely event the vendor or customer should experience a Year 2000 compliant failure. To date, 86% of our vendors have responded that they are Year 2000 compliant, 8% have reported that they are working diligently and will be Year 2000 compliant before January 1, 2000 and 6% have not yet stated their position (additional vendors have been added since last reported). The Company is closely following the progress of those vendors who are working on the project and will seek alternative vendors for all suppliers that can not become Year 2000 compliant or those vendors who have failed to respond to the Company's inquiries. The Company has utilized both internal and external resources to reprogram or replace, test and validate the software for Year 2000 modifications. The Company has estimated that the overall Year 2000 dollar expense for upgrades and equipment will total between $500,000 and $1,000,000. This budget estimate includes (but is not limited to) expenditures for upgrades to software and hardware for Item Processing as well as NCR ATM's, third party reviews of outsourcing vendors, proxy testing, PC software and hardware, the cost of service vendor mailings, follow-up testing, customer awareness efforts and commercial customer risk assessments. The Company has completed all renovations on critical systems. To date, the Company has incurred approximately $603,000 in expenses, funded through general operations. No major information technology projects have been significantly delayed as a result of Year 2000 compliance efforts. The costs of the project to complete the Year 2000 modifications are based on management's best estimates and efforts, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modifications plans and other factors. The Company does not anticipate any material disruption of service; however, there can be no guarantee that these estimates will be achieved. 15 Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process, which is governed by policies established by its Board of Directors which reviews and approves them annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO). In this capacity, ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits, and overall market interest-related level and trends. At Community Bank System, Inc, the fundamental purpose behind interest rate risk management is to maximize net interest income over both a short-term tactical and longer-term strategic time horizon. Because the Company does not believe it is possible to reliably predict future interest rate movements, it has maintained an appropriate process and set of measurement tools which enable it to identify and quantify sources of interest rate risk. The primary tool used by the Company in managing interest rate risk is income simulation. The analysis begins by measuring the impact of differences in maturity and repricing of all balance sheet positions. Such work is further augmented by adjusting for prepayment and embedded option risk found naturally in certain asset and liability classes. Finally, balance sheet growth and funding expectations are added to the analysis in order to reflect the strategic initiatives set forth by the Company. Changes in net interest income are reviewed after subjecting the balance sheet to an array of Treasury yield curve possibilities including an up or down 200 basis point movement in rates from current levels. While such an aggressive movement in rates provides management with good insight as to how the Company's profit margins may perform under extreme market conditions, results from a more modest shift in interest rates are used as a basis to conduct day-to-day business decisions. The following reflects the Company's one year net interest income sensitivity analysis as of March 31, 1999. In addition to a 200 basis point increase/decrease in rates, this analysis assumes a static, no growth balance sheet: Rate Change Estimated Basis Points Net Interest Income Sensitivity + 200 bp .43% - 200 bp (1.54%) The Company does not anticipate that results of the sensitivity analysis based on June 30, 1999 data will materially differ from the March 31, 1999 results. The preceeding interest rate risk analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While the assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. 16 Due to the potential for unexpected fluctuations in deposits and loans, active management of the Company's liquidity is critical. In order to respond to these circumstances, adequate sources of both on- and off-balance sheet funding are in place. CBSI's primary approach to measuring liquidity is known as the Basic Surplus/Deficit model. It is used to calculate liquidity over two time periods: first, the relationship within 30 days between liquid assets and short-term liabilities which are vulnerable to nonreplacement; and second, a projection of subsequent cash flow funding needs over an additional 60 days. The minimum policy level of liquidity under the Basic Surplus/Deficit approach is 7.5% of total assets for both the 30 and 90 day time horizons. As of June 30, 1999, this ratio was 15.5% and 14.3%, respectively. 17 Supplemental Schedules A) The following table sets forth certain information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the tables are on a fully tax-equivalent basis using a marginal federal income tax rate of 35%. Averages are computed on daily average balances for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest earnings for purposes of these computations.
Second Quarter Ended June 30, --------------------------------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------------------------------- (000's omitted excep yields Avg. Amt.of Avg. Avg. Amt. of Avg. and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate Paid Paid ASSETS: ------------------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold $ 315 $ 4 4.68% $ 6,891 $ 97 5.65% Time deposits in other banks 62 1 4.27% 35 1 5.76% Taxable investment securities 501,723 8,039 6.43% 627,169 10,218 6.54% Nontaxableinvestment securities 100,496 1,803 7.19% 26,002 520 8.02% Loans (net of unearned discount) 929,770 20,621 8.90% 877,616 20,548 9.39% ---------------------------- ---------------------------- Total interest-earning assets 1,532,366 30,468 7.97% 1,537,713 31,384 8.19% Noninterest earning assets Cash and due from banks 63,326 55,511 Premises and equipment 24,474 24,296 Other Assets 81,516 83,476 Less:allowance for loans (12,545) (12,245) Net unrealized gains/(losses) on available-for-sale portfolio 4,224 3,065 ----------- ----------- Total $ 1,693,361 $ 1,691,816 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabailities Savings deposits $ 518,952 2,823 2.18% $ 506,630 3,190 2.58% Time deposits 624,614 7,885 5.06% 695,905 9,740 5.61% Short-term borrowings 76,011 950 5.01% 8,163 113 5.55% Long-term borrowings 99,813 1,715 6.89% 134,806 2,253 6.70% --------------------------- --------------------------- Total interest-bearing 1,319,390 13,373 4.07% 1,345,504 15,296 4.56% liabilities Noninterest bearing liabilities Demand deposits 234,409 208,192 Other liabilities 20,668 18,255 Shareholders' equity 118,894 119,865 ----------- ----------- Total $ 1,693,361 $ 1,691,816 Net interest earnings $ 17,095 $ 16,088 ======== ======== Net yield on interest-earning assets 4.47% 4.20% ===== ===== Federal tax exemption on nontaxable investment securities included in interest income 575 166 18
B) The change in net interest income may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category. The volume and rate components of interest income and interest expense for each underlying category are as follows: ---------------------------------------- 2nd Quarter 1999 Versus 2nd Quarter 1998 ---------------------------------------- Increase (Decrease) Due to Change In (1) Volume Rate Net Change Interest earned on: Federal funds sold and securities purchased under agreements to resell (79) (14) (93) Time deposits in other banks 1 (1) Taxable investment securities (2,010) (169) (2,179) Nontaxable investment securities 1,655 (372) 1,283 Loans (net of unearned discounts) 4,618 (4,545) 73 Total interest-earning assets (2) (105) (811) (916) Interest paid on: Savings deposits 500 (867) (367) Time deposits (948) (907) (1,855) Short-term borrowings 914 (77) 837 Long-term borrowings (947) 409 (538) Total interest-bearing liabilities (294) (1,629) (1,923) Net interest earnings (2) (374) 1,381 1,007 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of change in each. 2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components. 19 C) The following table sets forth information by category of noninterest expenses of the Company for the periods indicated.
-------------------------------------------- --------------------------------------------- (000's omitted) Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------- --------------------------------------------- Change Change Change Change 1999 1998 Amount Percent 1999 1998 Amount Percent -------------------------------------------- --------------------------------------------- Personnel expense 6,494 6,542 (48) -0.7% 13,079 12,986 93 0.7% Net occupancy expense 987 1,004 (17) -1.7% 2,045 2,075 (30) -1.4% Equipment expense 903 814 89 10.9% 1,799 1,616 183 11.3% Professional fees 505 550 (45) -8.2% 963 931 32 3.4% Data processing expense 932 1,059 (127) -12.0% 1,832 2,032 (200) -9.8% Amortization 1,155 1,163 (8) -0.7% 2,313 2,332 (19) -0.8% Stationary and supplies 323 423 (100) -23.6% 620 718 (98) -13.6% Deposit insuranc premiums 45 46 (1) -2.2% 93 95 (2) -2.1% Disposition of branch properties 121 0 121 100.0% 322 0 322 100.0% Other 1723 1,565 158 10.1% 3,341 3,045 296 9.7% -------------------------------------------- --------------------------------------------- Total 13,188 13,166 22 0.2% 26,407 25,830 577 2.2% Total operating expenses as a percentage of average assets 3.12% 3.12% 0.00% pts 3.17% 3.12% 0.05% pts Efficiency ratio 56.8% 60.6% -3.8% pts 57.9% 59.4% -1.5% pts (excl one time items & intang. amort)
D) The amounts of the Company's loans outstanding (net of deferred loan fees or costs) at the dates indicated are shown in the following table according to type of loan: As of June 30, (000's omitted) Change Change 1999 1998 Amount Percent ----------------------------------------- Real estate mortgages: Residential 305,512 283,868 21,644 7.6% Commercial loans secured by real estate 121,862 108,332 13,530 12.5% Farm 13,213 11,618 1,595 13.7% ----------------------------------------- Total 440,587 403,818 36,769 9.1% Commercial,financial, and agricultural: Agricultural 24,853 24,189 664 2.7% Commercial and financial 164,551 154,451 10,100 6.5% ----------------------------------------- Total 189,404 178,640 10,764 6.0% Installment loans to individuals: Direct 101,390 101,698 (308) -0.3% Indirect 207,976 207,957 19 0.0% Student and other 2,369 3,278 (909) -27.7% ----------------------------------------- Total 311,735 312,933 (1,198) -0.4% Other Loans 1,643 655 988 150.8% ----------------------------------------- Gross Loans 943,369 896,046 47,323 5.3% Less: Unearned discounts 989 1,794 (805) -44.9% ----------------------------------------- Net loans 942,380 894,252 48,128 5.4% Reserve for possible loan losses 13,055 12,441 614 4.9% ----------------------------------------- Loans net of loan loss reserve 929,325 881,811 47,514 5.4% 20 E) The following table presents information concerning the aggregate amount of nonperforming assets: As of June 30, (000's omitted) ----------------------------------------- Change Change 1999 1998 Amount Percent ----------------------------------------- Loans accounted for on a nonaccrual basis 3,515 2,693 822 30.5% Accruing loans which are contractually past due 90 days or more as to principal or interest payments 1,189 1,350 (161) -11.9% ----- ----- ------ ------ Total nonperforming loans 4,704 4,043 661 16.3% Loans which are "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" 123 126 (3) -2.4% Other Real Estate 853 975 (122) -12.5% ----- ----- ------ ------ Total nonperforming assets 5,680 5,144 536 10.4% Ratio of allowance for loan losses to period-end loans 1.39% 1.39% (0.00) % pts --- Ratio of allowance for loan losses to period-end nonperforming loans 277.5% 308.0% (30.5) % pts --- Ratio of allowance for loan losses to period-end nonperforming assets 229.8% 241.9% (12.0) % pts --- Ratio of nonperforming assets to period-end total loans and other real estate owned 0.60% 0.56% 0.04 % pts --- The impact of interest not recognized on nonaccrual loans, and interest income that would have been recorded if the restructured loans had been current in accordance with their original terms, was immaterial. The Company's policy is to place a loan on a nonaccrual status and recognize income on a cash basis when it is more than ninety days past due, except when in the opinion of management it is well secured and in the process of collection. 21 F) The following table summarizes loan balances at the end of each period indicated and the daily average amount of loans. Also summarized are changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off and additions to the allowance which have been charged to expenses.
Three Months Ended June 30, Six Months Ended June 30, (000's omitted) ------------------------------------- ------------------------------------- Change Change Change Change 1999 1998 Amount Percent 1999 1998 Amount Percent ------------------------------------- ------------------------------------- Amount of loans outstanding at end of period 942,380 857,842 84,538 9.9% 942,380 857,842 84,538 9.9% Daily average amount of loans (net 929,770 877,616 52,154 5.9% 922,836 863,492 59,344 6.9% of unearned discount) Balance of allowance for possible loan losses at beginning of period 12,594 12,434 160 1.3% 12,441 12,434 7 0.1% Loans charged off: Commercial, financial, and agricultural 246 102 144 141.2% 372 281 91 32.4% Real estate construction 0 0 0 0 Real estate mortgage 3 (43) 46 -107.0% 33 0 33 100.0% Installment 983 1,450 (467) -32.2% 2,167 2,840 (673) -23.7% ------------------------------------- ------------------------------------- Total loans charged off 1,232 1,509 (277) -18.4% 2,572 3,121 (549) -17.6% Recoveries of loans previously charged off: Commercial, financial, and agricultural 32 12 20 166.7% 92 82 10 12.2% Real estate construction 0 0 0 0 Real estate mortgage 0 0 3 0 Installment 240 201 39 19.4% 501 372 129 34.7% ------------------------------------- ------------------------------------- Total recoveries 272 213 59 27.7% 596 454 142 31.3% Net loans charged off 960 1,296 (336) -25.9% 1,976 2,667 (691) -25.9% Additions to allowance charged to expense 1,421 1,303 118 9.1% 2,590 2,674 (84) -3.1% Balance at end of period 13,055 12,441 614 4.9% 13,055 12,441 614 4.9% Ratio of net chargeoffs to average loans outstanding .41% .59% -.18% ------ .43% .62% -.19% ------ 22
G) The following table sets forth information by category of noninterest income for the Company for the periods indicated.
----------------------------------------------- --------------------------------------- (000's omitted) Three Months Ended June 30, Six Months Ended June 30, ----------------------------------------------- --------------------------------------- 1999 1998 Change Change 1999 1998 Change Change Amount Percent Amount Percent ----------------------------------------------- --------------------------------------- Personal trust services 316 294 22 7.5% 667 568 99 17.4% Mutual fund and related investment 313 348 (35) -10.1% 637 598 39 6.5% products BPA/EBT income 628 610 18 3.0% 1,322 1,167 155 13.3% Deposit service charges 941 908 33 3.6% 1,803 1,722 81 4.7% Overdraft fees 796 720 76 10.6% 1,513 1,304 209 16.0% Other service charges and fees 811 642 169 26.3% 1,497 1,259 238 18.9% ----------------------------------------------- --------------------------------------- Total customer related revenue 3,805 3,522 283 8.0% 7,439 6,618 821 12.4% Net security gains (losses) 0 1,000 (1,000) -100.0% 277 1,266 (989) -78.1% Disposition of branch properties 0 (43) 43 -100.0% 0 (68) 68 -100.0% ----------------------------------------------- --------------------------------------- Nonrecurring other income 0 957 (957) -100.0% 277 1,198 (921) -76.9% Miscellaneous income 75 204 (129) -63.2% 267 550 (283) -51.5% ----------------------------------------------- --------------------------------------- Total 3,880 4,683 (803) -17.1% 7,983 8,366 (383) -4.6% Total noninterest income (excluding nonrecurring items) as a percentage 18.5% 18.8% (0.3) %pts. --- 18.8% 18.1% 0.7%pts. --- of operating income 23
Part II. Other Information Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities. Not Applicable Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Securities Holders. Not Applicable. Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K a) Exhibits required by Item 601 of Regulation S-K: (21) Subsidiaries of the registrant - Community Bank, National Association, State of New York - Community Financial Services, Inc., State of New York - Community Capital Trust I, State of Delaware - Benefit Plans Administrative Services, Inc., State of New York - CBNA Treasury Management Corporation, State of Delaware - Community Investment Services, Inc., State of New York - CBNA Preferred Funding Corporation, State of Delaware b) Reports on Form 8-K: Filed April 19, 1999 Item 5. Other Events. Disclosure of insider trading activity 24 Signatures Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Community Bank System, Inc. Date: August 13, 1999 /s/ Sanford A. Belden Sanford A. Belden,President and Chief Executive Officer Date: August 13, 1999 /s/ Charles M. Ertel Charles M. Ertel,Assistant Treasurer (Chief Accounting Officer) 25 EX-27 2 ARTICLE 9 FDS FOR 10-Q
9 1,000 6-MOS Jun-30-1999 Jun-30-1999 71,541 0 0 0 629,363 4,849 4,792 942,380 13,055 1,741,172 1,371,796 137,200 19,068 70,000 7,639 29,814 0 105,655 1,741,172 40,871 17,998 5 58,874 21,378 26,482 32,391 2,590 277 26,407 11,377 11,377 0 0 7,736 1.07 1.05 0 0 0 0 0 0 0 0 0 0 0 0
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