-----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, QFjNXLxFUQrV2B1JgzISiKhNWFJtVqGT4ak1UO2kGzaSEkRT/Mto065Z4qRNejdq mlImNRx3XjhzBjGAU35z9w== 0000723188-99-000014.txt : 19991117 0000723188-99-000014.hdr.sgml : 19991117 ACCESSION NUMBER: 0000723188-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752720 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 nine months ended September 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 - 7,104,929 shares outstanding as of November 3, 1999 1 INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Part I. Information Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- September 30, 1999, December 31, 1998 and September 30, 1998 Consolidated statements of income -- Three months ended September 30, 1999 and 1998 and nine months ended September 30, 1999 and 1998 Consolidated statements of cash flows -- Nine months ended September 30, 1999, and 1998 Consolidated statements of comprehensive income -- Nine months ended September 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 None 2 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION
September 30, December 31, September 30, 1999 1998 1998 - ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $65,091,886 $78,893,438 $57,081,062 Federal funds sold 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- TOTAL CASH AND CASH EQUIVALENTS 65,091,886 78,893,438 57,081,062 Investment securities U.S. Treasury 2,998,612 2,994,897 2,994,070 U.S. Government agencies and corporations 172,245,313 167,469,638 187,224,026 States and political subdivisions 116,938,713 44,628,567 38,679,080 Mortgage-backed securities 288,510,826 336,090,432 333,253,723 Federal Reserve Bank 2,173,950 2,173,950 2,173,950 Other securities 59,856,087 32,936,733 26,847,678 Investment securities at cost 642,723,501 586,294,217 591,172,527 Market value adjustment on available for sale securities (13,380,293) 7,245,550 10,952,652 - ---------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES 629,343,208 593,539,767 602,125,179 Loans 983,509,902 918,527,226 910,973,997 Less: Unearned discount 836,869 1,307,106 1,525,582 Reserve for possible loan losses 12,922,448 12,441,255 12,441,255 - ---------------------------------------------------------------------------------------------------------------------- NET LOANS 969,750,585 904,778,865 897,007,160 Bank premises and equipment 25,326,018 24,877,782 24,695,272 Accrued interest receivable 14,040,688 12,375,334 12,859,935 Intangible assets 51,188,821 54,438,219 55,183,219 Other assets 19,426,697 11,785,296 10,405,536 - ---------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,774,167,903 $1,680,688,701 $1,659,357,363 ====================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $235,931,666 $249,863,649 $217,916,933 Interest bearing 1,136,069,588 1,128,201,929 1,184,988,007 - ---------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS 1,372,001,254 1,378,065,578 1,402,904,940 - ---------------------------------------------------------------------------------------------------------------------- Federal funds purchased 19,400,000 34,700,000 2,000,000 Term borrowings 220,000,000 100,000,000 80,000,000 Company obligated mandatorily redeemable preferred securities of subsidiary, Community Capital Trust I holding solely junior subordinated debentures of the Company 29,815,500 29,810,438 29,808,750 Accrued interest and other liabilities 21,303,212 17,947,217 17,046,269 - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,662,519,966 1,560,523,233 1,531,759,959 - ---------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock (7,141,429; 7,296,453; 7,557,391 7,640,029 7,623,053 7,622,291 shares outstanding) Surplus 33,254,071 32,842,772 32,833,532 Undivided profits 92,117,129 84,591,247 82,497,354 Accumulated other comprehensive income (7,914,444) 4,285,743 6,478,493 Treasury stock (498,600; 326,600; 64,900 shares) (13,431,869) (9,151,956) (1,791,618) Shares issued under employee stock plan - unearned (16,979) (25,391) (42,648) - ---------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 111,647,937 120,165,468 127,597,404 - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,774,167,903 $1,680,688,701 $1,659,357,363 ====================================================================================================================== See notes to consolidated financial statements
3 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Interest Income: Interest and fees on loans $21,437,547 $21,164,790 $62,308,068 $61,551,640 Interest and dividends on investments: U.S. Treasury 67,630 67,338 202,839 201,455 U.S. Government agencies and corporations 3,073,221 4,084,379 9,127,545 12,969,949 States and political subdivisions 1,431,908 459,370 3,548,344 1,104,110 Mortgage-backed securities 4,701,497 4,921,719 12,953,255 15,772,155 Other securities 1,040,067 478,871 2,480,103 1,519,832 Interest on federal funds sold 0 111,768 3,681 276,298 Interest on deposits at other banks 457 467 1,542 1,462 - ------------------------------------------------------------------------------------------------------------------------ Total interest income 31,752,327 31,288,702 90,625,377 93,396,901 - ------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest on deposits Savings 2,805,526 3,060,212 8,393,354 9,376,800 Time 7,800,575 9,633,466 23,590,750 28,686,287 Interest on federal funds purchased and term borrowings 2,859,363 1,349,012 6,497,460 4,531,357 Interest on mandatorily redeemable capital securities of subsidiary 732,938 732,938 2,198,813 2,198,813 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 14,198,402 14,775,628 40,680,377 44,793,257 - ------------------------------------------------------------------------------------------------------------------------ Net interest income 17,553,925 16,513,074 49,945,000 48,603,644 Less: Provision for possible loan losses 1,099,178 1,176,560 3,689,140 3,850,638 - ------------------------------------------------------------------------------------------------------------------------ Net Interest income after provision for loan losses 16,454,747 15,336,514 46,255,860 44,753,006 - ------------------------------------------------------------------------------------------------------------------------ Other income: Fiduciary and investment services 535,356 461,804 1,786,192 1,407,096 Service charges on deposit accounts 1,889,621 1,848,686 5,205,664 4,874,648 Commissions on investment products 237,008 311,259 861,293 909,688 Other service charges, commissions and fees 1,838,951 1,342,208 4,087,740 3,391,740 Miscellaneous income 20,107 101,937 286,683 583,005 Investment security gains (losses) (498,990) 132,331 (222,348) 1,397,859 - ------------------------------------------------------------------------------------------------------------------------ Total other income 4,022,053 4,198,225 12,005,224 12,564,036 - ------------------------------------------------------------------------------------------------------------------------ Other expenses: Salaries and employee benefits 6,655,947 6,357,263 19,734,494 19,343,180 Occupancy expense, net 937,947 1,041,066 2,982,896 3,115,793 Equipment and furniture expense 778,568 992,138 2,577,291 2,608,620 Amortization of intangible assets 1,152,563 1,156,859 3,465,998 3,488,536 Other 3,740,429 3,440,803 10,911,859 10,261,926 - ------------------------------------------------------------------------------------------------------------------------ Total other expenses 13,265,454 12,988,129 39,672,538 38,818,055 - ------------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary item 7,211,346 6,546,610 18,588,546 18,498,987 Income taxes 2,309,064 2,374,083 5,949,768 6,736,701 - ------------------------------------------------------------------------------------------------------------------------ Income before extraordinary item 4,902,282 4,172,527 12,638,778 11,762,286 Cumulative effect of adopting FAS 133, net of taxes 0 193,859 0 193,859 - ------------------------------------------------------------------------------------------------------------------------ NET INCOME $4,902,282 $4,366,386 $12,638,778 $11,956,145 ======================================================================================================================== Earnings per share - Basic $0.69 $0.57 $1.75 $1.57 - Diluted $0.68 $0.56 $1.73 $1.54 ======================================================================================================================== See notes to consolidated financial statements
4 COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For Nine Months Ended September 30, 1999 and 1998
1999 1998 - ------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $12,638,778 $11,956,145 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,192,378 2,084,204 Amortization of intangible assets 3,465,998 3,488,536 Net amortization of security premiums and discounts 3,462,248 4,502,473 Amortization of discount on loans (470,237) 0 Provision for loan losses 3,689,140 3,850,638 Provision for deferred taxes 2,836,389 373,378 (Gain)\loss on sale of investment securities 222,348 (1,397,859) (Gain)\loss on sale of loans and other assets (192,329) (267,262) Change in interest receivable (1,665,354) 532,883 Change in other assets and other liabilities 1,449,636 1,559,877 Change in unearned loan fees and costs (992,999) (1,129,105) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 26,635,996 25,553,908 - ------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 10,003,654 68,334,830 Proceeds from maturities of held to maturity investment securities 2,160,894 49,116,687 Proceeds from maturities of available for sale investment securities 143,357,875 55,553,922 Purchases of held to maturity investment securities (2,968,688) (7,021,469) Purchases of available for sale investment securities (212,667,616) (153,079,155) Net change in loans outstanding (66,969,193) (68,760,903) Capital expenditures (2,700,055) (3,052,680) Proceeds from sales of property and equipment 23,339 0 Other investing activities (216,600) 0 - ------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (129,976,390) (58,908,768) - ------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts (7,563,501) 42,812,882 Net change in certificates of deposit 1,499,177 14,406,100 Net change in federal funds purchased (15,300,000) (43,000,000) Net change in term borrowings 120,000,000 0 Issuance (retirement) of common and preferred stock 187,928 464,449 Treasury stock purchased (4,279,913) (1,791,618) Cash dividends (5,004,849) (4,562,294) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 89,538,842 8,329,519 - ------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (13,801,552) (25,025,342) Cash and cash equivalents at beginning of year 78,893,438 82,106,403 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 65,091,886 57,081,062 =================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $40,252,379 $41,977,506 =================================================================================================================== Cash paid for income taxes $3,113,379 $7,011,612 =================================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $1,786,232 $1,749,286 Gross change in unrealized gains and (losses) on available-for-sale securities ($20,625,844) $6,254,573 =================================================================================================================== The accompanying notes are an integral part of the consolidated financial statements.
5 COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For Nine Months Ended September 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 $ (20,848,192) $ 7,652,432 Less: Reclassification adjustment for gains included in net income 222,348 (1,397,859) - --------------------------------------------------------------------------------------------- Other comprehensive income (loss), before tax (20,625,844) 6,254,573 Income tax benefit related to items of other comprehensive 8,425,657 (2,554,993) income - --------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax (12,200,187) 3,699,580 Plus: Net income 12,638,778 11,956,145 - --------------------------------------------------------------------------------------------- Comprehensive income $ 438,591 $ 15,655,725 ============================================================================================= See notes to consolidated financial statements
6 Community Bank System, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) September 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 nine month period ended September 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. ("Company"),formed a wholly-owned subsidiary, Community Capital Trust I ("Trust"), 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 September 30, 1999 were $31,246,080 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 three and nine months ended September 30, 1999 and 1998: - ------------------------------------------------------------------------------- For nine months ended Income Shares Per share September 30, 1999 amount - ------------------------------------------------------------------------------- Net Income 12,638,778 Basic EPS 12,638,778 7,215,683 $ 1.75 Effect of diluted securities: Stock options 0 87,493 ----------------------- DILUTED EPS $12,638,778 7,303,176 $ 1.73 =============================================================================== - ------------------------------------------------------------------------------- For nine months ended Income Shares Per share September 30, 1998 amount - ------------------------------------------------------------------------------- Net Income 11,956,145 Basic EPS 11,956,145 7,610,264 $ 1.57 Effect of diluted securities: Stock options 0 131,348 ----------------------- DILUTED EPS $11,956,145 7,741,612 $ 1.54 =============================================================================== - ------------------------------------------------------------------------------- For three months ended Income Shares Per share September 30, 1999 amount - ------------------------------------------------------------------------------- Net Income 4,902,282 Basic EPS 4,902,282 7,144,248 $ 0.69 Effect of diluted securities: Stock options 0 85,191 ----------------------- DILUTED EPS $4,902,282 7,229,439 $ 0.68 =============================================================================== - ------------------------------------------------------------------------------- For three months ended Income Shares Per share September 30, 1998 amount - ------------------------------------------------------------------------------- Net Income 4,366,386 Basic EPS 4,366,386 7,616,519 $ 0.57 Effect of diluted securities: Stock options 0 138,041 ----------------------- DILUTED EPS $4,366,386 7,754,560 $ 0.56 =============================================================================== 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 nine months ended September 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 June 30, 1999 as provided by the Federal Reserve System; the peer group is comprised of 156 bank holding companies having $1 to $3 billion in assets. Forward-Looking Statements This document contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company's plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company's control). Factors that could cause actual results to differ from those discussed in the forward-looking statements include: (1) risks related to credit quality, interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (3) the effect of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (4) inflation, interest rate, market and monetary fluctuations; (5) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (6) changes in consumer spending, borrowing and savings habits; (7) technological changes; (8) any acquisitions or mergers that might be considered by the Company and the costs and factors associated therewith; (9) the ability to maintain and increase market share and control expenses; (10) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) and generally accepted accounting principles; (11) changes in the Company's organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; (12) the costs and effects of litigation and of any adverse outcome in such litigation; and (13) the success of the Company at managing the risks of the foregoing. The foregoing list of important factors is not exclusive. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. 9 COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 3RD QUARTER 1999 AND FULL YEAR COMPARISONS
000s Omitted Three Months Ended September 30, Line Change Change No. Earnings 1999 1998 Amount Percent --------------- ---------------------------------------- 1 Net interest income $17,554 $16,513 $1,041 6.3% 2 Loan loss provision 1,099 1,177 (78) -6.6% 3 Net interest income after provision for loan losses 16,455 15,336 1,119 7.3% 4 Investment security gain (loss) (499) 132 (631) --- 5 Other income 4,521 4,066 455 11.2% 6 Other expense 12,113 11,831 282 2.4% 7 Intangible amortization 1,153 1,157 (4) -0.3% 8a Inc before inc tax and 7,211 6,546 665 10.2% extraordinary items 8b FAS 133 net of income taxes 0 194 (194) -100.0% 9 Income tax 2,309 2,374 (65) -2.7% 10 Net income $4,902 $4,366 $536 12.3% Earnings per share 11a Basic $0.69 $0.57 $0.12 21.1% 11b Diluted $0.68 $0.56 $0.12 21.4% =================================================== Balances At Period End ---------------------- 12 Loans $982,673 $909,448 $73,225 8.1% 13 Investments (excl mkt val adj, incl money mkt inv) 643,054 591,208 51,846 8.8% 14 Earning assets 1,625,727 1,500,656 125,071 8.3% 15 Loan loss reserve 12,922 12,441 481 3.9% 16 Intangible assets 51,189 55,183 (3,994) -7.2% 17 Total assets 1,774,168 1,659,357 114,811 6.9% 18 Deposits 1,372,001 1,402,905 (30,904) -2.2% 19 Borrowings 269,216 111,809 157,407 140.8% 20 Total equity $111,648 $127,597 ($15,949) -12.5%
10a
000s Omitted Nine Months Ended September 30, Line Change Change No. Earnings 1999 1998 Amount Percent --------------- ---------------------------------------- 1 Net interest income $49,945 $48,604 $1,341 2.8% 2 Loan loss provision 3,689 3,851 (162) -4.2% 3 Net interest income 46,256 44,753 1,503 3.4% after provision for loan losses 4 Investment security (222) 1,398 (1,620) --- gain (loss) 5 Other income 12,227 11,166 1,061 9.5% 6 Other expense 36,206 35,329 877 2.5% 7 Intangible amortization 3,466 3,489 (23) -0.7% 8a Inc before inc tax and 18,589 18,499 90 0.5% extraordinary items 8b FAS 133 net of income taxes 0 194 (194) -100.0% 9 Income tax 5,950 6,737 (787) -11.7% 10 Net income $12,639 $11,956 $683 5.7% Earnings per share 11a Basic $1.75 $1.57 $0.18 11.5% 11b Diluted $1.73 $1.54 $0.19 12.3% =================================================== Balances At Period End ---------------------- 12 Loans $982,673 $909,448 $73,225 8.1% 13 Investments (excl mkt val adj, incl money mkt inv) 643,054 591,208 51,846 8.8% 14 Earning assets 1,625,727 1,500,656 125,071 8.3% 15 Loan loss reserve 12,922 12,441 481 3.9% 16 Intangible assets 51,189 55,183 (3,994) -7.2% 17 Total assets 1,774,168 1,659,357 114,811 6.9% 18 Deposits 1,372,001 1,402,905 (30,904) -2.2% 19 Borrowings 269,216 111,809 157,407 140.8% 20 Total equity $111,648 $127,597 ($15,949) -12.5%
10b 000s Omitted Three Months Ended
Line Sep 30, Jun 30, Change Change No. Earnings 1999 1999 Amount Percent --------------- ------------------------------------------- 1 Net interest income $17,554 $16,519 $1,035 6.3% 2 Loan loss provision 1,099 1,421 (322) -22.7% 3 Net interest income after provision for loan losses 16,455 15,098 1,357 9.0% 4 Investment security gain (loss) (499) 0 (499) --- 5 Other income 4,521 3,880 641 16.5% 6 Other expense 12,113 12,033 80 0.7% 7 Intangible amortization 1,153 1,155 (2) -0.2% 8a Inc before inc tax and 7,211 5,790 1,421 24.5% extraordinary items 8b FAS 133 net of income taxes 0 0 0 0.0% 9 Income tax 2,309 1,742 567 32.6% 10 Net income $4,902 $4,048 $854 21.1% Earnings per share 11a Basic $0.69 $0.56 $0.13 23.2% 11b Diluted $0.68 $0.55 $0.13 23.6% ================================================== Balances At Period End ---------------------- 12 Loans $982,673 $942,380 $40,293 4.3% 13 Investments (excl mkt val adj, 643,054 639,734 3,320 0.5% incl money mkt inv) 14 Earning assets 1,625,727 1,582,114 43,613 2.8% 15 Loan loss reserve 12,922 13,055 (133) -1.0% 16 Intangible assets 51,189 52,299 (1,110) -2.1% 17 Total assets 1,774,168 1,748,666 25,502 1.5% 18 Deposits 1,372,001 1,379,290 (7,289) -0.5% 19 Borrowings 269,216 237,014 32,202 13.6% 20 Total equity $111,648 $113,294 ($1,646) -1.5%
10c COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 3RD QUARTER 1999 AND FULL YEAR COMPARISONS
000s Omitted Three Months Ended September 30, Line Change Change No. Profitability 1999 1998 Amount Percent -------------------- ---------------------------------------- 21 Return on assets 1.12% 1.03% 0.09 %pts.--- 22 Return on equity 17.17% 14.08% 3.09 %pts.--- 23 Cash EPS (diluted) $0.77 $0.65 $0.12 18.5% 24 Tangible return on 1.27% 1.19% 0.08 %pts.--- assets 25 Tangible return on 19.56% 16.28% 3.28 %pts.--- equity 26 Net interest margin 4.49% 4.34% 0.15 %pts.--- 27 Non interest income/ 19.9% 19.6% 0.4 %pts.--- operating income (excl sec gains) 28 Efficiency ratio 52.6% 56.9% (4.3) %pts.--- (excl one time items and intangible amortization) Capital ------- 29 Tier I leverage ratio 5.79% 5.92% (0.13) %pts.--- Common shares 30a Weighted average 7,248 7,756 (508) -6.6% 30b Period end 7,141 7,557 (416) -5.5% 31 Cash dividends declared $0.25 $0.23 $0.02 8.7% per common share 32 Common stock price $27.38 $28.69 ($1.32) -4.6% 33a Book value $15.63 $16.88 ($1.25) -7.4% 33b Tangible book value $8.55 $9.58 ($1.03) -10.8% Asset Quality Ratios -------------------- 34 Loan loss reserve / loans outstanding 1.32% 1.37% (0.05) %pts.--- 35 Nonperforming loans / loans outstanding 0.42% 0.48% (0.06) %pts.--- 36 Loan loss reserve / nonperforming loans 316% 286% 30 %pts.--- 37 Net charge-offs / average loans 0.51% 0.52% (0.01) %pts.--- 38 Loan loss provision / net charge-offs 89% 100% (11) %pts.--- 39 Nonperforming assets / loans outstanding+OREO 0.48% 0.62% (0.14) %pts.---
11a
000s Omitted Nine Months Ended September 30, Line Change Change No. Profitability 1999 1998 Amount Percent -------------------- ---------------------------------------- 21 Return on assets 0.99% 0.95% 0.04 %pts. --- 22 Return on equity 14.36% 13.24% 1.12 %pts. --- 23 Cash EPS (diluted) $2.01 $1.81 $0.20 11.0% 24 Tangible return on 1.15% 1.12% 0.03 %pts. --- assets 25 Tangible return on 16.69% 15.52% 1.17 %pts. --- equity 26 Net interest margin 4.45% 4.33% 0.12 %pts. --- 27 Non interest income/ 19.2% 18.6% 0.6 %pts. --- operating income (excl sec gains) 28 Efficiency ratio 56.0% 58.6% (2.6) %pts. --- (excl one time items and ) intangible amortization) Capital ------- 29 Tier I leverage ratio 5.79% 5.92% (0.13) %pts. --- Common shares 30a Weighted average 7,321 7,742 (421) -5.4% 30b Period end 7,141 7,557 (416) -5.5% 31 Cash dividends declared $0.71 $0.63 $0.08 12.7% per common share 32 Common stock price $27.38 $28.69 ($1.32) -4.6% 33a Book value $15.63 $16.88 ($1.25) -7.4% 33b Tangible book value $8.55 $9.58 ($1.03) -10.8% Asset Quality Ratios -------------------- 34 Loan loss reserve / loans outstanding 1.32% 1.37% (0.05)%pts. --- 35 Nonperforming loans / loans outstanding 0.42% 0.48% (0.06)%pts. --- 36 Loan loss reserve / nonperforming loans 316% 286% 30 %pts. --- 37 Net charge-offs / average loans 0.46% 0.59% (0.13)%pts. --- 38 Loan loss provision / net charge-offs 115% 100% 15 %pts. --- 39 Nonperforming assets / loans outstanding+OREO 0.48% 0.62% (0.14)%pts. ---
11b
000s Omitted Three Months Ended, Line Sep 30, Jun 30, Change Change No. Profitability 1999 1999 Amount Percent -------------------- ------------------------------------------ 21 Return on assets 1.12% 0.96% 0.16 %pts. --- 22 Return on equity 17.17% 13.66% 3.51 %pts. --- 23 Cash EPS (diluted) $0.77 $0.65 $0.12 18.5% 24 Tangible return on 1.27% 1.12% 0.15 %pts. --- assets 25 Tangible return on 19.56% 15.96% 3.60 %pts. --- equity 26 Net interest margin 4.49% 4.48% 0.01 %pts. --- 27 Non interest income/ 19.9% 18.5% 1.4 %pts. --- operating income (excl sec gains) 28 Efficiency ratio 52.6% 57.6% (5.0) %pts. --- (excl one time items and ) intangible amortization) Capital 29 Tier I leverage ratio 5.79% 5.71% 0.08 %pts. --- Common shares 30a Weighted average 7,248 7,322 (74) -1.0% 30b Period end 7,141 7,144 (3) 0.0% 31 Cash dividends declared $0.25 $0.23 $0.02 8.7% per common share 32 Common stock price $27.38 $25.38 $2.00 7.9% 33a Book value $15.63 $15.86 ($0.23) -1.4% 33b Tangible book value $8.55 $8.54 $0.01 0.1% Asset Quality Ratios 34 Loan loss reserve / loans outstanding 1.32% 1.39% (0.07) %pts. --- 35 Nonperforming loans / loans outstanding 0.42% 0.50% (0.08) %pts. --- 36 Loan loss reserve / nonperforming loans 316% 278% 38 %pts. --- 37 Net charge-offs / average loans 0.51% 0.41% 0.10 %pts. --- 38 Loan loss provision / net charge-offs 89% 148% (59) %pts. --- 39 Nonperforming assets / loans outstanding+OREO 0.48% 0.60% (0.12) %pts. ---
11c COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 3RD QUARTER 1999 AND FULL YEAR COMPARISONS 000s Omitted
Three Months Ended September 30, Line Change Change No. Asset Quality Components 1999 1998 Amount Percent ----------------------------------------- 40 Nonaccruing loans $3,257 $2,726 $531 19.5% 41 90+ days delinquent 836 1,629 -793 -48.7% 42 Tot nonperforming loans $4,093 $4,355 -$262 -6.0% 43 Troubled debt 119 138 -19 -13.8% restructurings 44 Other real estate 501 1,248 -747 -59.9% 45 Tot nonperforming assets $4,713 $5,741 ($1,028) -17.9% Components of Net Interest Margin 46 Loan yield 8.85% 9.34% (0.49) %pts. --- 47 Investment yield 6.74% 6.53% 0.21 %pts. --- 48 Earning asset yield 8.00% 8.18% (0.18) %pts. --- 49 Interest bearing deposits rate 3.72% 4.21% (0.49) %pts. --- 50 Borrowed funds rate 5.88% 6.73% (0.85) %pts. --- 51 Cost of all interest 4.10% 4.44% (0.34) %pts. --- bearing funds 52 Cost of funds 3.49% 3.81% (0.32) %pts. --- (includes DDA) 53 Cost of funds / earning 3.51% 3.84% (0.33) %pts. --- assets 54 Net interest margin 4.49% 4.34 0.15 %pts. --- 55 Full tax equivalent adj. $614 $214 $400 186.9% Average Balances for Period 56 Loans $960,860 $898,992 $61,868 6.9% 57 Investments (excl. mkt val adj) 643,622 629,083 14,539 2.3% 58 Earning assets 1,604,482 1,528,075 76,407 5.0% 59 Total assets 1,743,095 1,682,609 60,486 3.6% 60 Deposits 1,371,162 1,416,923 (45,761) -3.2% 61 Borrowings 242,367 122,696 119,671 97.5% 62 Total equity $113,266 $123,061 ($9,795) -8.0%
12a
Nine Months Ended September 30, Line Change Change No. Asset Quality Components 1999 1998 Amount Percent ----------------------------------------- 40 Nonaccruing loans $3,257 $2,726 $531 19.5% 41 90+ days delinquent 836 1,629 -793 -48.7% 42 Tot nonperforming loans $4,093 $4,355 -$262 -6.0% 43 Troubled debt restructurings 119 138 -19 -13.8% restructurings 44 Other real estate 501 1,248 -747 -59.9% 45 Tot nonperforming assets $4,713 $5,741 -$1,028 -17.9% Components of Net Interest Margin 46 Loan yield 8.90% 9.40% (0.50) %pts. --- 47 Investment yield 6.53% 6.75% (0.22) %pts. --- 48 Earning asset yield 7.96% 8.27% (0.31) %pts. --- 49 Interest bearing deposits rate 3.76% 4.27% (0.51) %pts. --- 50 Borrowed funds rate 6.01% 6.71% (0.70) %pts. --- 51 Cost of all interest 4.09% 4.52% (0.43) %pts. --- bearing funds 52 Cost of funds 3.47% 3.90% (0.43) %pts. --- (includes DDA) 53 Cost of funds / earning 3.51% 3.95% (0.43) %pts. --- assets 54 Net interest margin 4.45% 4.33% 0.12 %pts. --- 55 Full tax equivalent adj. $1,578 $516 $1,062 205.8% Average Balances for Period 56 Loans $935,650 $875,455 $60,195 6.9% 57 Investments (excl. mkt val adj) 612,457 642,342 (29,885) -4.7% 58 Earning assets 1,548,107 1,517,797 30,310 2.0% 59 Total assets 1,702,105 1,674,595 27,510 1.6% 60 Deposits 1,371,853 1,401,471 (29,618) -2.1% 61 Borrowings 193,311 134,038 59,273 44.2% 62 Total equity $117,687 $120,759 ($3,072) -2.5%
12b
Three Months Ended, Line Sep 30, Jun 30, Change Change No. Asset Quality Components 1999 1999 Amount Percent ----------------------------------------- 40 Nonaccruing loans $3,257 $3,515 -$258 -7.3% 41 90+ days delinquent 836 1,189 -353 -29.7% 42 Tot nonperforming loans $4,093 $4,704 -$611 -13.0% 43 Troubled debt restructurings 119 123 -4 -3.3% restructurings 44 Other real estate 501 853 -352 -41.3% 45 Tot nonperforming assets $4,713 $5,680 -$967 -17.0% Components of Net Interest Margin 46 Loan yield 8.85% 8.90% (0.05) %pts.--- 47 Investment yield 6.74% 6.55% 0.19 %pts.--- 48 Earning asset yield 8.00% 7.97% 0.03 %pts.--- 49 Interest bearing deposits rate 3.72% 3.76% (0.04) %pts.--- 50 Borrowed funds rate 5.88% 6.08% (0.20) %pts.--- 51 Cost of all interest 4.10% 4.07% 0.03 %pts.--- bearing funds 52 Cost of funds 3.49% 3.45% 0.04 %pts.--- (includes DDA) 53 Cost of funds / earning 3.51% 3.50% 0.01 %pts.--- assets 54 Net interest margin 4.49% 4.48% 0.01 %pts.--- 55 Full tax equivalent adj $614 $575 $39 6.8% Average Balances for Period 56 Loans $960,860 $929,770 $31,090 3.3% 57 Investments (excl. mkt val adj) 643,622 602,596 41,026 6.8% 58 Earning assets 1,604,482 1,532,366 72,116 4.7% 59 Total assets 1,743,095 1,693,361 49,734 2.9% 60 Deposits 1,371,162 1,377,975 -6,813 -0.5% 61 Borrowings 242,367 175,824 66,543 37.8% 62 Total equity $113,266 $118,894 -$5,628 -4.7%
12c Earnings per share (diluted) for third quarter 1999 reached $.68, a record high for the Company and up 21% over the prior year; for the nine month period, earnings per share rose 12.3% to $1.73. Net income for the quarter and nine months was $4.902 million and $12.639 million, up 12.3% and 5.7%, 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, 498,600 shares or 6.5% of shares outstanding have been bought back. Compared to second quarter 1999 results, earnings per share (diluted) were higher by $.13 or 24% while net income was up $854,000 or 21%. Cash earnings per share (diluted) for the quarter increased to $.77, up 10.2% compared to last year. Cash or tangible return on assets (ROA) was 1.27% versus nominal ROA at 1.12%. And tangible return on equity (ROE) for the quarter rose 3.28 percentage points over one year earlier to 19.56%, exceeding nominal ROE by 2.39 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 reflect a combination of continued stability in our net interest margin over the last six months at 4.49% this quarter (up 15 basis points from one year ago), a second consecutive period of strong loan growth from being unchanged during the first quarter (up 8.1% since September 30, 1998), and greater contribution from the Bank's investment portfolio, where yields have improved and a full three-months' benefit was felt from purchases made during the April to June 1999 period (the portfolio being now 8.8% higher than one year earlier). Other important performance factors include increased noninterest income (up 11.2% from third quarter last year), careful management of overhead (up slightly from second quarter levels but a modest 2.4% increase over four quarters earlier), and improved tax planning (reflected in a 4.5 percentage point reduction in the year-to-date effective tax rate). Nearly $500,000 in securities losses was realized this quarter on sales of $5.9 million, resulting in higher net interest income in future periods; $132,000 in gains was recognized in third quarter 1998 as part of managing our investment portfolio on a total return basis in that interest rate environment. An overriding achievement of the quarter is that net interest income (full tax equivalent) achieved the highest level in our history, exceeding its previous record in fourth quarter 1997. Net interest income has improved for the third consecutive period to $18.2 million from the 1998 quarterly low in the fourth quarter of $16.0 million. Even though fourth quarter 1997 margins were 30 basis points higher than now, the current net interest milestone occurred because of $175 million more in average earning assets. Seventy two percent of that increase reflects loan growth despite Upstate New York's generally lackluster economy. Net interest income in the most recent quarter also benefited from the restoration of yields on the Company's premium collateralized mortgage obligations (CMOs), whose performance had been penalized since first quarter 1998 due to historically high refinancing activity causing unusually large prepayments on the underlying mortgages. Funding of $76 million in growth in average earning assets over the last year has largely been a combination of $22 million more in personal and business demand deposits (up 10.9%) and growth in capital market borrowings, $61 million of which replaced run-off of large municipal deposits. Third quarter noninterest income (excluding net securities gains/losses) rose 11.2% from one year earlier to $4.5 million. Over half of the increase related to financial services, which rose by $260,000. The two primary factors explaining that improvement are 22% more revenues from the Company's EBT/BPA business, which provides investment management, pension administration and consulting services, and a 50% increase in the annual dividend the Company receives from the sale of creditor life insurance underwritten by a subsidiary of the New York State Bankers Association. The balance of the increase in noninterest income was from deposit service charges and miscellaneous commissions, which rose over 13%. 13 For the first nine months, noninterest income, excluding net securities gains/losses and one-time events related to the disposition of branch properties, has risen by nearly $1.0 million or 8.9% over the same period last year. Financial services, which now comprises 37% of total fee income, rose 12.8%; specialty products, which largely includes electronic and mortgage banking and servicing activities, climbed 32%, contributing 11% of fee income; and general banking fees, making up 52% of noninterest income, increased 2.6%. Noninterest income, excluding transactions related to investment securities and disposal of branch properties, as a percent of operating income rose to 19.2% in the first nine months of 1999 compared to 18.6% one year earlier. Loans rose over $40 million during the last three months to nearly $983 million, the strongest quarterly loan growth in the Company's history (the last record, excluding acquisitions, being in second quarter 1998), building on a $25 million increase in the preceding quarter. During the last twelve months, loans have grown by over $73 million or 8.1%; in addition, $43.8 million in mortgages has been originated and sold in the secondary market, resulting in total managed loan growth of 11.9%. The largest share of growth in loans outstanding during the third quarter was in commercial loans at $14.7 million, 16% greater than the previous quarter's increase and well in excess of growth in the three quarters prior to that. Consumer direct loans (including home equity loans), which last quarter rose modestly for the first time since the Company's mid-1997 branch acquisitions, increased an unusually large $13.2 million, primarily due to the successful "Summer Sizzler" promotion. Next, extending the climb which began in late March 1999, indirect consumer installment loans (predominantly automobile financing) increased an additional $9.0 million, over 50% more than second quarter 1999's pick-up. Lastly, consumer mortgages were up a modest $3.4 million in response to reduced mortgage activity caused by rising interest rates. Similarly, origination and sale of mortgages in the secondary market were $6.0 million for the quarter, which compares to $8.8 million in second quarter 1999 and $11.1 million in third quarter 1998. Nonperforming loans ended the quarter at $4.0 million or .42% of loans outstanding, down over $600,000 and .08%, respectively, during the last three months and below September 30, 1998 levels as well. Based on the most recent peer bank data as of June 30, 1999, when the Company's nonperforming loan ratio was .50%, CBSI ranked in the favorable 36th percentile. With the exception of last quarter, nonperforming loans have been in the acceptable $4.0-$4.4 million range for the last two years. The ratio of loan loss reserves to loans outstanding decreased seven basis points during the quarter to 1.32%, but because of lower nonperforming loans, coverage over nonperformers improved to 316%, a level which management believes to be adequate. The ratio of delinquencies (30 days or more) and nonaccruals to total loans decreased from the June 30, 1999 level to 1.35% at September 30, having remained in the 1.30% to 1.50% band for the last eighteen months, well within the Company's internal guideline of 2.0%. Loan loss provision expense decreased to $1.1 million for the third quarter, $78,000 below the same period last year and $322,000 less than for the second quarter of this year. This latter large decrease is due to the provision in that period having anticipated $275,000 in charge-offs in the current quarter on two commercial customers. Actual charge-offs taken on those loans were $380,000. Net charge-offs on installment loans continued to exhibit the improvements achieved since their peak in fourth quarter 1997, down $1.0 million or 30% for the first nine months of 1999 versus 1998, and as a percentage of installment loans outstanding, averaging almost 45 basis points lower at 1.02%. Net charge-offs for the Company as a whole averaged .46% of loans outstanding through September 30 versus .59% last year. The year-to-date provision covered actual net charge-offs by 1.15 times, this margin having been established in 1999 as a precaution in the event the Upstate New York economy weakens after its long sustained period of relative economic health. 14 The Company's nine month efficiency ratio (recurring overhead less intangible amortization compared to net interest plus recurring other income) improved to 56.0% from 58.5% through September 30 of last year. 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. For the first nine months of this year, overhead (before intangible amortization) rose $877,000 or 2.5% over the same 1998 period. Excluding branch disposal expenses of $501,000 this year versus none in 1998 and $142,000 in losses on fraudulent customer transactions, overhead has risen .7%. 15 Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than 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, that 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, 90% 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 2% 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 none of the later group is deemed to be in any way significant. 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 $800,000 and $1,000,000. This budget estimate includes (but is not limited to) expenditures for upgrades to Item Processing software and hardware, NCR ATM's, third party reviews of outsourcing vendors, proxy testing, PC software and hardware, the cost of service vendors 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 $655,000 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. 16 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 related interest 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 June 30, 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 .20% - 200 bp (1.25%) The Company does not anticipate that results of the sensitivity analysis based on September 30, 1999 data will materially differ from the June 30, 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. 17 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 September 30, 1999, this ratio was 16.5% and 18.4%, respectively. 18
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. Third Quarter Ended September 30, --------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------- (000's omitted except Avg. Amt. of Avg. Avg. Amt. of Avg. yields and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate Paid Paid ASSETS: --------------------------------------------------------------------- Interest-earning assets: Federal funds sold $ 0 $ 0 0.00% $ 8,191 $ 112 5.41% Time deposits in 74 0 1.24% 35 0 5.30% other banks Taxable investment 530,251 8,990 6.73% 585,392 9,553 6.47% securities Nontaxable investment 113,297 1,938 6.79% 35,465 673 7.53% securities Loans (net of 960,860 21,438 8.85% 898,992 21,165 9.34% unearned discount) -------- --------- --------- --------- Total interest-earning 1,604,482 32,366 8.00% 1,528,075 31,503 8.18% assets Noninterest earning assets Cash and due from 57,340 55,615 banks Premises and equipment 24,307 24,649 Other Assets 78,341 82,709 Less:allowance for loans (12,942) (12,270) Net unrealized gains/(losses) on available-for-sale portfolio (8,433) 3,831 -------- --------- Total $ 1,743,095 $ 1,682,609 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Savings deposits $ 514,671 2,806 2.16% $ 511,138 3,060 2.38% Time deposits 615,821 7,801 5.03% 685,490 9,634 5.58% Short-term borrowings 142,552 1,862 5.18% 7,182 103 5.69% Long-term borrowings 99,815 1,730 6.88% 115,514 1,979 6.80% ----------------- ------------------- Totalinterest-bearing 1,372,859 14,199 4.10% 1,319,324 14,776 4.44% liabilities Noninterest bearing liabilities Demand deposits 240,670 220,294 Other liabilities 16,300 19,930 Shareholders' equity 113,266 123,061 -------- --------- Total $ 1,743,095 $ 1,682,609 ========= ========= Net interest earnings $ 18,167 $ 16,727 ========= ========= Net yield on 4.49% 4.34% interest-earning assets ======= ======= Federal tax exemption on nontaxable investment securities included in interest income 614 214
19 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: --------------------------------- 3rd Quarter 1999 versus 3rd Quarter 1998 --------------------------------- Increase (Decrease) Due to Change In (1) Net Volume Rate Change Interest earned on: Federal funds sold and securities purchased under (56) (56) (112) agreements to resell Time deposits in other banks 2 (2) - Taxable investment (2,486) 1,923 (563) securities Nontaxable investment 1,714 (449) 1,265 securities Loans (net of unearned 5,147 (4,874) 273 discounts) Total interest-earning assets (2) 4,365 (3,502) 863 Interest paid on: 138 (392) (254) Savings deposits Time deposits (930) (903) (1,833) Short-term borrowings 1,823 (64) 1,759 Long-term borrowings (398) 149 (249) Total interest-bearing 2,909 (3,486) (577) liabilities (2) Net interest earnings (2) 853 587 1,440 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. 20 C) The following table sets forth information by category of noninterest expenses of the Company for the periods indicated.
Three Months Ended September 30, Nine Months Ended September 30, (000's omitted) -------------------------------------- -------------------------------------- Change Change Change Change 1999 1998 Amount Percent 1999 1998 Amount Percent -------------------------------------- -------------------------------------- Personnel expense 6,655 6,357 298 4.7% 19,734 19,343 391 2.0% Net occupancy expense 938 1,041 (103) -9.9% 2,983 3,116 (133) -4.3% Equipment expense 778 993 (215) -21.7% 2,577 2,609 (32) -1.2% Professional fees 570 535 35 6.5% 1,533 1,466 67 4.6% Data processing expense 1,050 957 93 9.7% 2,877 2,989 (112) -3.7% Amortization 1,153 1,157 (4) -0.3% 3,466 3,489 (23) -0.7% Stationary and supplies 291 333 (42) -12.6% 911 1,051 (140) -13.3% Deposit insurance premiums 44 48 (4) -8.3% 137 143 (6) -4.2% Disposition of branch 179 0 179 100.0% 501 0 501 100.0% properties Other 1,607 1,825 (218) -11.9% 4,953 4,870 83 1.7% -------------------------------------- -------------------------------------- Total 13,265 12,988 277 2.1% 39,672 38,818 854 2.2% Total operating expenses as a percentage of average assets 3.02% 3.06% -0.04% pts 3.12% 3.10% 0.02% pts Efficiency ratio 52.6% 56.9% -4.3% pts 56.0% 58.6% -2.6% 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 September 30, (000's omitted) ------------------------------- Change Change 1999 1998 Amount Percent Real estate mortgages: ------------------------------- Residential 310,964 290,066 20,898 7.2% Commercial loans secured by real estate 127,625 111,747 15,878 14.2% Farm 15,253 11,902 3,351 28.2% ------------------------------- Total 453,842 413,715 40,127 9.7% Commercial, financial, and agricultural Agricultural 26,172 24,478 1,694 6.9% Commercial and financial 170,984 159,525 11,459 7.2% ------------------------------- Total 197,156 184,003 13,153 7.1% Installment loans to individuals: Direct 106,537 99,817 6,720 6.7% Indirect 216,905 206,536 10,369 5.0% Student and other 6,469 6,049 420 6.9% ------------------------------- Total 329,911 312,402 17,509 5.6% Other Loans 2,601 854 1,747 204.6% ------------------------------- Gross Loans 983,510 910,974 72,536 8.0% Less: Unearned discounts 837 1,526 (689) -45.2% ------------------------------- Net loans 982,673 909,448 73,225 8.1% Reserve for possible loan losses 12,922 12,441 481 3.9% ------------------------------- Loans, net of loan loss reserve 969,751 897,007 72,744 8.1% 21 E) The following table presents information concerning the aggregate amount of nonperforming assets: As of September 30, (000's omitted) ---------------------------------------------- Change Change 1999 1998 Amount Percent ---------------------------------------------- Loans accounted for on a nonaccrual basis 3,257 2,726 531 19.5% Accruing loans which are contractually past due 90 days or more as to principal or interest payments 836 1,629 (793) -48.7% Total nonperforming loans 4,093 4,355 (262) -6.0% 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" 119 138 (19) -13.8% Other Real Estate 501 1,248 (747) -59.9% Total nonperforming assets 4,713 5,741 (1,028) -17.9% Ratio of allowance for loan losses to period-end loans 1.32% 1.37% (0.05)% pts --- Ratio of allowance for loan losses to period-end nonperforming loans 315.7% 286.0% 29.7% pts --- Ratio of allowance for loan losses to period-end nonperforming assets 274.2% 216.7% 57.5% pts --- Ratio of nonperforming assets to period-end total loans and other real estate owned 0.48% 0.62% (0.14)% 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. 22 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 September 30, Nine Months Ended September 30, (000's omitted) ----------------------------------------- ------------------------------------------- Change Change Change Change 1999 1998 Amount Percent 1999 1998 Amount Percent ----------------------------------------- ------------------------------------------- Amount of loans outstanding at end of period 983,510 910,974 72,536 8.0% 983,510 910,974 72,536 8.0% Daily average amount of loans (net 960,860 898,992 61,868 6.9% 935,650 898,992 36,658 4.1% of unearned discount) Balance of allowance for possible loan losses at beginning of period 13,055 12,441 614 4.9% 12,441 12,434 7 0.1% Loans charged off: Commercial, financial, and agricultural 492 129 363 281.4% 864 410 454 110.7% Real estate construction 0 0 0 0 Real estate mortgage 0 20 (20) -100.0% 33 20 13 65.0% Installment 1,000 1,235 (235) -19.0% 3,167 4,075 (908) -22.3% ----------------------------------------- ------------------------------------------- Total loans charged off 1,492 1,384 108 7.8% 4,064 4,505 (441) -9.8% Recoveries of loans previously charged off: Commercial, financial, and agricultural 2l 51 (30) -58.8% 113 133 (20) -15.0% Real estate construction 0 0 0 0 Real estate mortgage 2 0 5 0 Installment 237 157 80 51.0% 738 529 209 39.5% ----------------------------------------- ------------------------------------------- Total recoveries 260 208 52 25.0% 856 662 194 29.3% Net loans charged off 1,232 1,176 56 4.8% 3,208 3,843 (635) -16.5% Additions to allowance charged to expense 1,099 1,176 (77) -6.5% 3,689 3,850 (161) -4.2% Balance at end of period 12,922 12,441 481 3.9% 12,922 12,441 481 3.9% Ratio of net chargeoffs to average loans outstanding 0.51% 0.52% -0.01% ------ 0.46% 0.59% -0.13% ------
23 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 September 30, Nine Months Ended September 30, ------------------------------------------------------------------- 1999 1998 Change Change 1999 1998 Change Change Amount Percent Amount Percent -------------------------------- --------------------------------- Personal trust services 295 292 3 1.0% 962 860 102 11.9% Mutual fund and related investment products 262 312 (50) -16.0% 899 910 (11) -1.2% BPA/EBT income 670 594 76 12.8% 1,992 1,761 231 13.1% Deposit service charges 1,047 1,003 44 4.4% 2,850 2,725 125 4.6% Overdraft fees 843 846 (3) -0.4% 2,356 2,150 206 9.6% Other service charges 1,407 918 489 53.3% 2,904 2,177 727 33.4% and fees -------------------------------- --------------------------------- Total customer related 4,524 3,965 559 14.1% 11,963 10,583 1,380 13.0% revenue Net security gains (499) 132 (631) -478.0% (222) 1,398 (1,620) -115.9% (losses) Disposition of branch 0 0 0 0 0 (68) 68 -100.0% properties -------------------------------- --------------------------------- Nonrecurring other (499) 132 (631) -478.0% (222) 1,330 (1,552) -116.7% income Miscellaneous income (3) 101 (104) -103.0% 264 651 (387) -59.4% -------------------------------- --------------------------------- Total 4,022 4,198 (176) -4.2% 12,005 12,564 (559) -4.4% Total noninterest income (excluding nonrecurring items) as a percentage 19.9% 19.6% 0.4%pts--- 19.2% 18.6% 0.6%pts--- of operating income
24 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: None 25 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: November 12, 1999 Sanford A. Belden, President and Chief Executive Officer Date: November 12, 1999 Charles M. Ertel, Assistant Treasurer Chief Accounting Officer 26 EX-27 2 ARTICLE 9 FDS FOR 10-Q
9 1,000 9-MOS Sep-30-1999 Sep-30-1999 65,092 0 0 0 624,497 4,846 4,882 982,673 12,922 1,774,168 1,372,001 169,400 21,303 70,000 7,640 29,816 0 104,008 1,774,168 62,308 28,312 5 90,625 31,984 40,680 49,945 3,689 (222) 39,673 18,589 18,589 0 0 12,639 1.75 1.73 0 0 0 0 0 0 0 0 0 0 0 0
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