-----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, V18CYTXnp1UOW18s6QiKnzXHx/+X0BZCJ9Q7BeMQhfFTPBpBPj+TYe6+GIoPg78e Rqv90VheB9on8neNAN2+Lw== 0000950110-98-001351.txt : 19981123 0000950110-98-001351.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950110-98-001351 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC CENTRAL INDEX KEY: 0000723188 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98753000 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, 1998 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 -- 7,295,691 shares as of November 2, 1998. ================================================================================ INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES PART I. INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- September 30, 1998, December 31, 1997 and September 30, 1997 Consolidated statements of income -- Three months ended September 30, 1998 and 1997 and nine months ended September 30, 1998 and 1997. Consolidated statements of cash flows -- Nine months ended September 30, 1998 and 1997 Consolidated statements of comprehensive income -- Six months ended September 30, 1998 and 1997 Item 2. Management 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 September 30, December 31, September 30, 1998 1997 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $57,081,062 $82,106,403 $72,105,973 Federal funds sold 0 0 3,000,000 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CASH AND CASH EQUIVALENTS 57,081,062 82,106,403 75,105,973 Investment securities U.S. Treasury 2,994,070 2,991,739 2,990,946 U.S. Government agencies and corporations 187,224,026 243,234,221 277,771,789 States and political subdivisions 38,679,080 20,181,494 18,651,744 Mortgage-backed securities 333,253,723 311,840,524 262,248,197 Federal Reserve Bank 2,173,950 2,173,950 2,173,950 Other securities 26,847,678 26,760,028 26,750,379 ------------------------------------------------------- Investment securities at cost 591,172,527 607,181,956 590,587,005 Market value adjustment on available for sale securities 10,952,652 4,710,022 4,540,236 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT SECURITIES 602,125,179 611,891,978 595,127,241 Loans 910,973,997 845,962,085 830,257,565 Less: Unearned discount 1,525,582 2,750,228 3,352,976 Reserve for possible loan losses 12,441,255 12,433,812 12,369,348 - - ------------------------------------------------------------------------------------------------------------------------------------ NET LOANS 897,007,160 830,778,045 814,535,241 Bank premises and equipment 24,695,272 23,649,279 22,251,293 Accrued interest receivable 12,859,935 13,392,818 13,876,616 Intangible assets 55,183,219 58,671,755 60,479,341 Other assets 10,405,536 13,251,973 12,879,994 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,659,357,363 $1,633,742,251 $1,594,255,699 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $217,916,933 $202,573,162 $203,467,158 Interest bearing 1,184,988,007 1,143,112,796 1,181,425,521 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 1,402,904,940 1,345,685,958 1,384,892,679 Federal funds purchased 2,000,000 45,000,000 0 Term borrowings 80,000,000 80,000,000 50,000,000 Company obligated mandatorily redeemable preferred securities of subsidiary Community Capital Trust 1 holding solely junior subordinated debentures of the company 29,808,750 29,803,688 29,802,000 Accrued interest and other liabilities 17,046,269 15,240,622 15,099,243 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 1,531,759,959 1,515,730,268 1,479,793,922 - - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity: Preferred stock $100 stated value 0 0 0 Common stock (7,557,391; 7,586,512; 7,549,462 shares outstanding) 7,622,291 7,586,512 7,549,462 Surplus 32,833,532 32,401,331 31,526,693 Undivided profits 82,497,354 75,335,527 72,858,506 Accumulated other comprehensive income 6,478,493 2,778,913 2,678,739 Treasury stock (64,900 shares) (1,791,618) 0 0 Shares issued under employee stock plan - unearned (42,648) (90,300) (151,623) - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 127,597,404 118,011,983 114,461,777 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,659,357,363 $1,633,742,251 $1,594,255,699 ====================================================================================================================================
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, 1998 1997 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $21,164,790 $19,220,892 $61,551,640 $51,351,986 Interest and dividends on investments: U.S. Treasury 67,338 67,288 201,455 201,322 U.S. Government agencies and corporations 4,084,379 6,154,071 12,969,949 18,662,087 States and political subdivisions 459,370 268,219 1,104,110 677,307 Mortgage-backed securities 4,921,719 4,413,071 15,772,155 13,305,600 Other securities 478,871 455,653 1,519,832 1,341,522 Interest on federal funds sold 111,768 618,483 276,298 761,228 Interest on deposits at other banks 467 510 1,462 1,334 - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income 31,288,702 31,198,187 93,396,901 86,302,386 - - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits Savings 3,060,212 3,110,870 9,376,800 7,874,410 Time 9,633,466 9,413,390 28,686,287 24,266,931 Interest on federal funds purchased and term borrowings 1,349,012 1,144,565 4,531,357 6,455,525 Interest on mandatorily redeemable capital securities of subsidiary 732,938 716,687 2,198,813 1,938,250 - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 14,775,628 14,385,512 44,793,257 40,535,116 - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 16,513,074 16,812,675 48,603,644 45,767,270 Less: Provision for possible loan losses 1,176,560 1,235,000 3,850,638 2,815,000 - - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest income after provision for loan losses 15,336,514 15,577,675 44,753,006 42,952,270 - - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME: Fiduciary and investment services 461,804 414,613 1,407,096 1,194,942 Service charges on deposit accounts 1,848,686 1,503,541 4,874,648 3,514,176 Commissions on investment products 311,259 256,380 909,688 747,956 Other service charges, commissions and fees 1,342,208 1,176,516 3,391,740 2,722,611 Other operating income 101,937 46,871 583,005 74,794 Investment security gains (losses) 132,331 4,637 1,397,859 4,637 - - ----------------------------------------------------------------------------------------------------------------------------------- Total other income 4,198,225 3,402,558 12,564,036 8,259,116 - - ----------------------------------------------------------------------------------------------------------------------------------- OTHER EXPENSES: Salaries and employee benefits 6,357,263 6,147,884 19,343,180 16,633,575 Occupancy expense, net 1,041,066 904,809 3,115,793 2,474,621 Equipment and furniture expense 992,138 644,102 2,608,620 1,954,086 Amortization of intangible assets 1,156,859 1,141,248 3,488,536 2,520,688 Other 3,440,803 3,448,541 10,261,926 9,309,192 - - ----------------------------------------------------------------------------------------------------------------------------------- Total other expenses 12,988,129 12,286,584 38,818,055 32,892,162 - - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and change in accounting 6,546,610 6,693,649 18,498,987 18,319,224 Income taxes 2,374,083 2,459,000 6,736,701 6,752,000 - - ----------------------------------------------------------------------------------------------------------------------------------- Income before change in accounting 4,172,527 4,234,649 11,762,286 11,567,224 Cumulative effect of change in accounting principal (FAS 133), net of taxes 193,859 0 193,859 0 - - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $4,366,386 $4,234,649 $11,956,145 $11,567,224 =================================================================================================================================== EARNINGS PER SHARE - BASIC $0.57 $0.56 $1.57 $1.53 - DILUTED $0.56 $0.55 $1.54 $1.50 ===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 4
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For Nine Months Ended September 30, 1998 and 1997 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income 11,956,145 11,567,224 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,084,204 1,542,424 Net amortization of intangible assets 3,488,536 2,520,687 Net amortization of security premiums and discounts 4,502,473 (222,810) Provision for loan losses 3,850,638 2,815,000 Provision for deferred taxes 373,378 (140,818) (Gain)\Loss on sale of investment securities (1,397,859) (4,637) (Gain)\Loss on sale of loans and other assets (267,262) (74,794) Change in interest receivable 532,883 (3,086,545) Change in other assets and other liabilities 1,559,878 9,703 Change in unearned loan fees and costs (1,129,105) (674,441) - - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 25,553,909 14,250,993 - - ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 68,334,830 45,901,587 Proceeds from maturities of held to maturity investment securities 49,116,687 68,181,763 Proceeds from maturities of available for sale investment securities 55,553,922 10,605,524 Purchases of held to maturity investment securities (7,021,469) (7,328,804) Purchases of available for sale investment securities (153,079,156) (130,780,769) Net change in loans outstanding (68,760,903) (175,804,853) Capital expenditures (3,052,680) (7,009,354) Premium paid for branch acquisitions 0 (28,210,898) - - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (58,908,769) (224,445,804) - - ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 42,812,882 186,791,050 Net change in certificates of deposit 14,406,100 170,888,373 Net change in Federal Funds purchased (43,000,000) (31,800,000) Net change in term borrowings 0 (115,000,000) Issuance of mandatorily redeemable capital securities of subsidiary 0 29,802,000 Issuance (retirement) of common and preferred stock 464,449 (3,680,122) Treasury stock purchased (1,791,618) 0 Cash dividends (4,562,294) (4,235,243) - - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 8,329,519 232,766,058 - - ----------------------------------------------------------------------------------------------------------------------------------- Change In Cash And Cash Equivalents (25,025,341) 22,571,247 Cash and cash equivalents at beginning of year 82,106,403 52,534,726 - - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 57,081,062 75,105,973 =================================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid For Interest $59,805,228 $36,487,592 =================================================================================================================================== Cash Paid For Income Taxes $7,011,612 $7,932,467 =================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $1,749,286 $1,509,892 ===================================================================================================================================
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, 1998 and 1997 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, before tax: Unrealized gains on securities: Change in unrealized holding gains arising during period $ 7,980,173 $ 2,930,902 Less: reclassification adjustment for gains included in net income (1,725,600) 4,637 - - ---------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, before tax 6,254,573 2,935,539 Income tax expense related to items of other comprehensive income (2,554,993) (1,195,379) - - ---------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax 3,699,580 1,740,160 Plus: Net income 11,956,145 11,567,224 - - ---------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $15,655,725 $13,307,384 ==================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 6 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 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, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. 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 September 30, 1998 were $29,808,750 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. Of these securities $17,424,000 was sold during the same reporting quarter, giving rise to securities gains which are reported on the income statement as a cumulative effect of change in accounting principal (FAS 133), net of tax in the amount of $194,000. 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 months ended September 30:
Income Shares Per Share Amount - - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPAL Net Income for Three Months Ended Sep 30, 1998 $4,172,527 Basic EPS 4,172,527 7,616,519 $ 0.55 Effect of dilutive securities: Stock options 0 139,950 ------------------------------------- DILUTED EPS $4,172,527 7,756,469 $ 0.54 =================================================================================================================== CHANGE IN ACCOUNTING PRINCIPAL NET OF TAX Net Income for Three Months Ended Sep 30, 1998 $193,859 Basic EPS 193,859 7,616,519 $ 0.03 Effect of dilutive securities: Stock options 0 139,950 ------------------------------------- DILUTED EPS $193,859 7,756,469 $ 0.02 =================================================================================================================== NET INCOME Net Income for Three Months Ended Sep 30, 1998 $4,366,386 Basic EPS 4,366,386 7,616,519 $ 0.57 Effect of dilutive securities: Stock options 0 139,950 ------------------------------------- DILUTED EPS $4,366,386 7,756,469 $ 0.56 =================================================================================================================== INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPAL Net Income for Nine Months Ended Sep 30, 1998 $11,762,286 Basic EPS 11,762,286 7,610,264 $ 1.55 Effect of dilutive securities: Stock options 0 131,348 ------------------------------------- DILUTED EPS $11,762,286 7,741,612 $ 1.52 =================================================================================================================== CHANGE IN ACCOUNTING PRINCIPAL NET OF TAX Net Income for Nine Months Ended Sep 30, 1998 $193,859 Basic EPS 193,859 7,610,264 $ 0.03 Effect of dilutive securities: Stock options 0 131,348 ------------------------------------- DILUTED EPS $193,859 7,741,612 $ 0.03 =================================================================================================================== NET INCOME Net Income for Nine Months Ended Sep 30, 1998 $11,956,145 Basic EPS 11,956,145 7,610,264 $ 1.57 Effect of dilutive securities: Stock options 0 131,348 ------------------------------------- DILUTED EPS $11,956,145 7,741,612 $ 1.54 ===================================================================================================================
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 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, 1998 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, 1998 as provided by the Federal Reserve System; the peer group is comprised of 140 bank holding companies having $1 to $3 billion in assets. 9
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 3RD AND 2ND QUARTER 1998 AND FULL YEAR COMPARISONS 000s Omitted Three Months Ended September 30, Line --------------- Change Change No. Earnings 1998 1997 Amount Percent --------------- ------- ------- ------ ------- 1 Net interest income $16,513 $16,813 ($300) -1.8% 2 Loan loss provision 1,177 1,235 (58) -4.7% 3 Net interest income after 15,336 15,578 (242) -1.6% provision for loan losses 4 Investment security gain (loss) 132 5 127 -- 5 Other income 4,066 3,398 668 19.7% 6 Other expense 11,831 11,146 685 6.1% 7 Intangible amortization 1,157 1,141 16 1.4% 8a Income before tax & 6,546 6,694 (148) -2.2% extraordinary items 8b Cum effect FAS 133 net of tax 194 0 194 9 Income tax 2,374 0 2,374 10 Net income $4,366 $6,694 ($2,328) -34.8% Earnings per share 11a Basic $0.57 $0.56 $0.01 1.8% 11b Diluted $0.56 $0.55 $0.01 1.8% ======== ======== ======== ====== Balances At Period End ---------------------------------- 12 Loans $909,448 $826,905 $82,543 10.0% 13 Investments (excl. mkt val adj) 591,173 590,587 586 0.1% 14 Earning assets 1,500,656 1,417,527 83,129 5.9% 15 Loan loss reserve 12,441 12,369 72 0.6% 16 Intangible assets 55,183 60,479 (5,296) -8.8% 17 Total assets 1,659,357 1,594,256 65,101 4.1% 18 Deposits 1,402,905 1,384,893 18,012 1.3% 19 Borrowings 111,809 79,802 32,007 40.1% 20 Total equity $127,597 $114,462 $13,135 11.5% 000s Omitted Nine Months Ended September 30, Line --------------- Change Change No. Earnings 1998 1997 Amount Percent --------------- ------- ------- ------ ------- 1 Net interest income $48,604 $45,767 $2,837 6.2% 2 Loan loss provision 3,851 2,815 1,036 36.8% 3 Net interest income after 44,753 42,952 1,801 4.2% provision for loan losses 4 Investment security gain (loss) 1,398 5 1,393 --- 5 Other income 11,166 8,254 2,912 35.3% 6 Other expense 35,329 30,371 4,958 16.3% 7 Intangible amortization 3,489 2,521 968 38.4% 8a Income before tax & 18,499 18,319 180 1.0% extraordinary items 8b Cum effect FAS 133 net of tax 194 0 194 9 Income tax 194 0 194 10 Net income $18,499 $18,319 $180 1.0% Earnings per share 11a Basic $1.57 $1.53 $0.04 2.6% 11b Diluted $1.54 $1.50 $0.04 2.7% ======== ======== ======== ====== ---------------------------------- Balances At Period End ---------------------------------- 12 Loans $909,448 $826,905 $82,543 10.0% 13 Investments (excl. mkt val adj) 591,173 590,587 586 0.1% 14 Earning assets 1,500,656 1,417,527 83,129 5.9% 15 Loan loss reserve 12,441 12,369 72 0.6% 16 Intangible assets 55,183 60,479 (5,296) -8.8% 17 Total assets 1,659,357 1,594,256 65,101 4.1% 18 Deposits 1,402,905 1,384,893 18,012 1.3% 19 Borrowings 111,809 79,802 32,007 40.1% 20 Total equity $127,597 $114,462 $13,135 11.5% 000s Omitted Three Months Ended, Line --------------- Sep 30, Jun 30, Change Change No. Earnings 1998 1998 Amount Percent --------------- ------- ------- ------ ------- 1 Net interest income $16,513 $15,922 $591 3.7% 2 Loan loss provision 1,177 1,303 (126) -9.7% 3 Net interest income after 15,336 14,619 717 4.9% provision for loan losses 4 Investment security gain (loss) 132 1,000 (868) --- 5 Other income 4,066 3,683 383 10.4% 6 Other expense 11,831 12,003 (172) -1.4% 7 Intangible amortization 1,157 1,163 (6) -0.5% 8a Income before tax & 6,546 6,136 410 6.7% extraordinary items 8b Cum effect FAS 133 net of tax 194 0 194 9 Income tax 2,374 2,234 140 6.3% 10 Net income $4,366 3,902 464 11.9% Earnings per share 11a Basic $0.57 $0.51 $0.06 11.8% 11b Diluted $0.56 $0.50 $0.06 12.0% ======== ======== ======== ====== ---------------------------------- Balances At Period End ---------------------------------- 12 Loans $909,448 $894,252 $15,196 1.7% 13 Investments (excl. mkt val adj) 591,173 632,047 (40,874) -6.5% 14 Earning assets 1,500,656 1,526,334 (25,678) -1.7% 15 Loan loss reserve 12,441 12,441 0 0.0% 16 Intangible assets 55,183 56,340 (1,157) -2.1% 17 Total assets 1,659,357 1,699,295 (39,938) -2.4% 18 Deposits 1,402,905 1,416,391 (13,486) -1.0% 19 Borrowings 111,809 142,307 (30,498) -21.4% 20 Total equity $127,597 $122,670 $4,927 4.0%
10
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS KEY RATIO RECAP 3RD AND 2ND QUARTER 1998 AND FULL YEAR COMPARISONS 000s Omitted Three Months Ended September 30, Line ---------------- Change Change No. Profitability 1998 1997 Amount Percent --- ---------------- ------ ------ ------ ------- 21 Return on assets 1.03% 1.06% (0.03)%pts. --- 22 Return on equity 14.08% 15.01% (0.93)%pts. --- 23 Cash earnings per share ( diluted) $0.65 $0.64 $0.01 1.6% 24 Tangible return on assets 1.19% 1.23% (0.04)%pts. --- 25 Tangible return on equity 16.28% 17.41% (1.13)%pts. --- 26 Net interest margin 4.34% 4.67% (0.37)%pts. --- 27 Non interest income / 19.6% 16.7% 2.9 %pts. --- operating income (excl. sec. gains) 28 Efficiency ratio (excl. sec. gains & intang. amort.) 57.2% 54.8% 2.4 %pts. --- ----------- Capital ----------- 29 Tier I leverage ratio 5.92% 5.32% 0.60 %pts. --- Common shares outstanding 30a Weighted average 7,756 7,671 85 1.1% 30b Period end 7,557 7,549 8 0.1% 31 Cash dividends declared per common share $0.23 $0.20 $0.03 15.0% 32 Common stock price $28.69 $29.00 ($0.31) -1.1% 33a Book value $16.88 $15.16 $1.72 11.3% 33b Tangible book value $9.58 $7.15 $2.43 34.0% ----------------------------- Asset Quality Ratios ----------------------------- 34 Loan loss reserve / loans outstanding 1.37% 1.50% (0.13)%pts. --- 35 Nonperforming loans / loans outstanding 0.48% 0.53% (0.05)%pts. --- 36 Loan loss reserve / nonperforming loans 286% 284% 2 %pts. --- 37 Net charge-offs / average loans 0.52% 0.49% 0.03 %pts. --- 38 Loan loss provision / net charge-offs 100% 125% (25)%pts. --- 39 Nonperforming assets / loans outstanding + OREO 0.62% 0.63% (0.01)%pts. --- 000s Omitted Nine Months Ended September 30, Line ---------------- Change Change No. Profitability 1998 1997 Amount Percent ----- ---------------- ------ ----- -------- ------- 21 Return on assets 0.95% 1.06% (0.11)%pts. --- 22 Return on equity 13.24% 14.22% (0.98)%pts. --- 23 Cash earnings per share ( diluted) $1.81 $1.69 $0.12 7.1% 24 Tangible return on assets 1.12% 1.20% (0.08)%pts. --- 25 Tangible return on equity 15.52% 16.06% (0.54)%pts. --- 26 Net interest margin 4.34% 4.59% (0.25)%pts. --- 27 Non interest income / 18.6% 15.2% 3.4 %pts. --- operating income (excl. sec. gains) 28 Efficiency ratio (excl. sec. gains & intang. amort.) 58.7% 55.9% 2.8 %pts. --- ----------- Capital ----------- 29 Tier I leverage ratio 5.92% 5.32% 0.60 %pts. --- Common shares outstanding 30a Weighted average 7,742 7,661 81 1.1% 30b Period end 7,557 7,549 8 0.1% 31 Cash dividends declared per common share $0.63 $0.56 $0.07 12.5% 32 Common stock price $28.69 $29.00 ($0.31) -1.1% 33a Book value $16.88 $15.16 $1.72 11.3% 33b Tangible book value $9.58 $7.15 $2.43 34.0% ----------------------------- Asset Quality Ratios ----------------------------- 34 Loan loss reserve / loans outstanding 1.37% 1.50% (0.13)%pts. --- 35 Nonperforming loans / loans outstanding 0.48% 0.53% (0.05)%pts. --- 36 Loan loss reserve / nonperforming loans 286% 284% 2 %pts. --- 37 Net charge-offs / average loans 0.59% 0.39% 0.20 %pts. --- 38 Loan loss provision / net charge-offs 100% 133% (33)%pts. 39 Nonperforming assets / loans outstanding + OREO 0.62% 0.63% (0.01)%pts. --- 000s Omitted Three Months Ended, Line ---------------- Sep 30, Jun 30, Change Change No. Profitability 1998 1998 Amount Percent ---------------- ------ ------ ------ ------- 21 Return on assets 1.03% 0.93% 0.10 %pts. --- 22 Return on equity 14.08% 13.06% 1.02 %pts. --- 23 Cash earnings per share ( diluted) $0.65 $0.59 $0.06 10.2% 24 Tangible return on assets 1.19% 1.09% 0.10 %pts. --- 25 Tangible return on equity 16.28% 15.34% 0.94 %pts. --- 26 Net interest margin 4.34% 4.20% 0.14 %pts. --- 27 Non interest income / 19.6% 18.7% 0.9 %pts. --- operating income (excl. sec. gains) 28 Efficiency ratio (excl. sec. gains & intang. amort.) 57.2% 60.8% (3.7)%pts. --- ----------- Capital ----------- 29 Tier I leverage ratio 5.92% 5.75% 0.17 %pts. --- Common shares outstanding 30a Weighted average 7,756 7,759 (3) 0.0% 30b Period end 7,557 7,622 (65) -0.9% 31 Cash dividends declared per common share $0.23 $0.20 $0.03 15.0% 32 Common stock price $28.69 $31.31 ($2.62) -8.4% 33a Book value $16.88 $16.09 $0.79 4.9% 33b Tangible book value $9.58 $8.70 $0.88 10.1% ----------------------------- Asset Quality Ratios ----------------------------- 34 Loan loss reserve / loans outstanding 1.37% 1.39% (0.02)%pts. --- 35 Nonperforming loans / loans outstanding 0.48% 0.45% 0.03 %pts. --- 36 Loan loss reserve / nonperforming loans 286% 308% (22.32)%pts. --- 37 Net charge-offs / average loans 0.52% 0.59% (0.07)%pts. --- 38 Loan loss provision / net charge-offs 100% 100% 0.00 %pts. --- 39 Nonperforming assets / loans outstanding + OREO 0.62% 0.56% 0.06 %pts. ---
11
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS KEY RATIO RECAP 3RD AND 2ND QUARTER 1998 AND FULL YEAR COMPARISONS 000s Omitted Three Months Ended September 30, Line -------------------------------------- Change Change No. Asset Quality Components 1998 1997 Amount Percent ----- -------------------------------------- ------ ------ ------ ------- 40 Nonaccruing loans $2,726 $1,903 $823 43.2% 41 90+ days delinquent 1,629 2,459 -830 -33.8% ----- ----- ---- ------ 42 Tot nonperforming loans $4,355 $4,362 -$7 -0.2% 43 Troubled debt restructurings 138 0 138 -- 44 Other real estate 1,248 872 376 43.1% ----- --- --- ----- 45 Tot nonperforming assets $5,741 $5,234 $507 9.7% ------------------------------------------------- Components of Net Interest Margin ------------------------------------------------- 46 Loan yield 9.34% 9.52% (0.18)%pts. ---- 47 Investment yield 6.53% 7.53% (1.00)%pts. ---- 48 Earning asset yield 8.18% 8.64% (0.46)%pts. ---- 49 Interest bearing deposits rate 4.21% 4.28% (0.07)%pts. ---- 50 Borrowed funds rate 6.73% 7.13% (0.40)%pts. ---- 51 Cost of all interest bearing funds 4.44% 4.51% (0.07)%pts. ---- 52 Cost of funds (includes DDA) 3.81% 3.91% (0.10)%pts. ---- 53 Cost of funds / earning assets 3.84% 3.97% (0.13)%pts. ---- 54 Net interest margin 4.34% 4.67% (0.33)%pts. ---- 55 Full tax equivalent adjustment $214 $127 $87 68.5% ----------------------------------------- Average Balances for Period ----------------------------------------- 56 Loans $898,992 $800,598 $98,394 12.3% 57 Investments (excl. mkt val adj) 629,082 637,996 (8,914) -1.4% 58 Earning assets 1,528,075 1,438,593 89,482 6.2% 59 Total assets 1,682,609 1,587,153 95,456 6.0% 60 Deposits 1,416,923 1,354,624 62,299 4.6% 61 Borrowings 122,696 103,596 19,100 18.4% 62 Total equity $123,061 $111,892 $11,169 10.0% 000s Omitted Line -------------------------------------- Change Change No. Asset Quality Components 1998 1997 Amount Percent ----- -------------------------------------- ------ ------ ------ ------- 40 Nonaccruing loans $2,726 $1,903 $823 43.2% 41 90+ days delinquent 1,629 2,459 -830 -33.8% ----- ----- ---- ------ 42 Tot nonperforming loans $4,355 $4,362 -$7 -0.2% 43 Troubled debt restructurings 138 0 138 -- 44 Other real estate 1,248 872 376 43.1% ----- --- --- ----- 45 Tot nonperforming assets $5,741 $5,234 $507 9.7% ------------------------------------------------- Components of Net Interest Margin ------------------------------------------------- 46 Loan yield 9.40% 9.53% (0.13) %pts. ----- 47 Investment yield 6.75% 7.59% (0.84) %pts. ----- 48 Earning asset yield 8.27% 8.63% (0.36) %pts. ----- 49 Interest bearing deposits rate 4.27% 4.27% 0.00 %pts. ----- 50 Borrowed funds rate 6.71% 6.59% 0.12 %pts. ----- 51 Cost of all interest bearing funds 4.52% 4.61% (0.09) %pts. ----- 52 Cost of funds (includes DDA) 3.90% 4.05% (0.15) %pts. ----- 53 Cost of funds / earning assets 3.95% 4.04% (0.09) %pts. ----- 54 Net interest margin 4.33% 4.59% (0.26) %pts. ----- 55 Full tax equivalent adjustment $516 $319 $197 61.8% ----------------------------------------- Average Balances for Period ----------------------------------------- 56 Loans $875,455 $720,589 $154,866 21.5% 57 Investments (excl. mkt val adj) 642,341 620,996 21,345 3.4% 58 Earning assets 1,517,797 1,341,554 176,243 13.1% 59 Total assets 1,674,595 1,460,976 213,619 14.6% 60 Deposits 1,401,471 1,167,151 234,320 20.1% 61 Borrowings 134,038 170,337 (36,299) -21.3% 62 Total equity $120,759 $109,155 $11,604 10.6% 000s Omitted Three Months Ended, Line -------------------------------------- Sep 30, Jun 30, Change Change No. Asset Quality Components 1998 1998 Amount Percent -------------------------------------- ------- ------- ------ ------- 40 Nonaccruing loans $2,726 $2,693 $33 1.2% 41 90+ days delinquent 1,629 1,350 279 20.7% ----- ----- --- ----- 42 Tot nonperforming loans $4,355 $4,043 $312 7.7% 43 Troubled debt restructurings 138 126 12 9.5% 44 Other real estate 1,248 975 273 28.0% ----- --- --- ----- 45 Tot nonperforming assets $5,741 $5,144 $597 11.6% ------------------------------------- Components of Net Interest Margin ------------------------------------- 46 Loan yield 9.34% 9.39% (0.05)%pts. --- 47 Investment yield 6.53% 6.60% (0.07)%pts. --- 48 Earning asset yield 8.18% 8.19% (0.01)%pts. --- 49 Interest bearing deposits rate 4.21% 4.31% (0.10)%pts. --- 50 Borrowed funds rate 6.73% 6.64% 0.09 %pts. --- 51 Cost of all interest bearing funds 4.44% 4.56% (0.12)%pts. --- 52 Cost of funds (includes DDA) 3.81% 3.95% (0.14)%pts. --- 53 Cost of funds / earning assets 3.84% 3.99% (0.15)%pts. --- 54 Net interest margin 4.34% 4.20% 0.14 %pts. --- 55 Full tax equivalent adjustment $214 $132 $82 62.1% ----------------------------------------- Average Balances for Period ----------------------------------------- 56 Loans $898,992 $877,616 $21,376 2.4% 57 Investments (excl. mkt val adj) 629,082 660,097 -31,015 -4.7% 58 Earning assets 1,528,075 1,537,713 -9,638 -0.6% 59 Total assets 1,682,609 1,691,816 -9,207 -0.5% 60 Deposits 1,416,923 1,410,726 6,197 0.4% 61 Borrowings 122,696 142,969 -20,273 -14.2% 62 Total equity $123,061 $119,865 $3,196 2.7%
12 Net income for the third quarter and first nine months of 1998 reached record highs of $4.366 million and $11.956 million, up 3.1% and 3.4%, respectively, over the comparable 1997 periods. Earnings per share (diluted) also established new records of $.56 for the third quarter and $1.54 year-to-date, up at a slightly slower pace of 1.8% and 2.7%, respectively, because of higher average shares outstanding. Compared to second quarter 1998 results, third quarter 1998 net income rose by $464,000 while earnings per share climbed by $.06, both measures up by approximately 12%. Cash earnings per share increased to $.65 for the third quarter of 1998, up 1.6% compared to last year, and were 7.1% higher at $1.81 for the first nine months. Cash or tangible return on assets (ROA) was 1.12% year-to-date while nominal ROA was .95%. And tangible return on equity (ROE) at 15.52% exceeded nominal ROE by 2.28 percentage points at 13.24% 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 continued progress in strengthening our franchise following our mid-1997 acquisition of a combined 20 branches from Key Bank, N.A. and Fleet Bank. While loan growth slowed to a comparatively modest $15.2 million during the third quarter, loans are up $82.5 million or 10% over the last twelve months, with growth in the purchased branches contributing nearly half of this increase. Particularly important to our third quarter results is an improvement in recurring fee income, up by 19.7% compared to the same period last year. Net charge-offs at .52% of average loans continued to decrease from an unusually high level for our company at .76% in the fourth quarter of 1997. While the flat Treasury yield curve of the last nine months has put downward pressure on yields especially in our investment portfolio, unrealized gains in that portfolio remain substantial at $11.0 million, even after $460,000 in gains taken in the third quarter, $1.0 million in the second quarter, and $266,000 in the first quarter. These gains resulted from investment strategies involving $67 million in sales designed to improve the company's interest rate risk position. As of July 1, 1998, the company moved virtually all its held-to-maturity investment securities to its available-for-sale portfolio with the adoption of Financial Accounting Standard 133; $328,000 of gains taken in the quarter were from these transferred securities and are reported on an after-tax basis at $194,000 as an extraordinary item. Approximately 65,000 shares have been acquired through quarter end under the company's 750,000 stock repurchase program announced on September 17, 1998. It is anticipated that program will result in meaningful improvements in earnings per share and return on equity over time. The timing of repurchases is being paced by using securities cash flow to pay down selected high cost liabilities instead of reinvesting it in the currently unattractive financial market environment. Reflective of pressure on the company's net interest margin compared to last year at this time, third quarter net interest income was lower by 1.8% or $300,000. Compared to second quarter 1998, however, net interest income is up by $591,000 or 3.7% despite $9.6 million less in average earning assets. Yields on earning assets remained largely unchanged while the cost of funds decreased by over 1/8th of a point due to downward pricing of deposits and reduced borrowings. Consequently, the net interest margin rose 13 basis points over the linked quarter to 4.34%. Year-to-date, the net interest margin averaged 4.33% versus 4.59% in 1997; including securities gains, the adjusted net interest margin is 4.48% and 4.59%, respectively. Relative stability in earning asset yields for the third quarter compared to the second quarter was achieved despite a decrease in overall financial market rates. Declines were very modest in the overall loan and investment portfolio yield, and the mix of earning assets held in investment securities was reduced due to nearly $41 million in sales and run-off. During the quarter, the company experienced a slight reduction in accelerated amortization of premiums on certain collateralized mortgage obligations (CMOs) caused by unusually high mortgage refinancing activity nationwide. Even with such activity during the last nine months, the investment portfolio yield has averaged a favorable 127 basis point spread over the 3-year Treasury rate. 13 Loans increased during the third quarter by $15.2 million to $909 million as of September 30, 1998. This growth represented about 40% of second quarter 1998's record growth, but exceeded the first quarter 1998 rate of $12.3 million, which was reduced by the North Country ice storm and regular seasonal factors. This quarter's growth entirely resided in business lending and consumer mortgages, up $8.3 million and $8.1 million, respectively, or a bit more than half their second quarter expansion. In general, commercial loan business development efforts were less successful during the summer months, but the success of the bank's no-closing cost residential mortgage program remained good. Sales of mortgages in the secondary market were virtually the same as in the second quarter at $11.1 million. Automobile model change-over and conservative underwriting combined for a net decrease in indirect loans of $1.2 million. Consumer direct loans were unchanged. As the previously discussed reduction in net charge-off ratios suggests, the dollar amount of net charge-offs was also reduced for the third consecutive quarter to $1.177 million from $1.6 million in the fourth quarter of 1997. Greatest improvement has occurred in direct installment loans followed by indirect installment and commercial loans. The loan loss provision continues to equally cover net charge-offs; there has been a 2 basis point decrease since June 30, 1998 in the loan loss reserve to loans outstanding ratio to 1.37% due to loan growth. Nonperforming loans at $4.4 million are virtually the same as one year earlier, though the decrease in 90 day delinquencies has almost been equally offset by higher nonaccruals. Compared to the level at June 30, 1998, nonperformers are up $312,000 or 7.7%; nonaccruals are nearly unchanged with higher delinquencies accounting for most of the increase. These flows reflect what management believes to be normal changes within the portfolio due to isolated situations and do not reflect any systemic problems; the ratio of nonperformers to total loans increased slightly to .48% from three months earlier, when it represented the very favorable 22nd peer percentile. Loss reserve coverage over nonperformers is an ample 286% compared to the 250% industry norm at June 30, 1998. Combined delinquencies (30 days or more) and nonaccruals were 1.39% of total loans as of September 30, 1998 versus 1.82% at year end, remaining well within the company's internal guideline of 2.0%. The company's third quarter 1998 efficiency ratio (overhead less intangible amortization compared to net interest and other income before net securities gains) improved to 57.2% from 60.8% in the second quarter. Favorable factors were the increase in net interest income discussed above and a $383,000 increase in noninterest income, largely comprised of $220,000 greater service charges and overdraft fees (in part reflecting a mid-second quarter pricing increase), a 26% increase in the company's annual dividend to $305,000 from its participation in the New York State Bankers' Creditor Life Insurance program, $72,000 more in fees from secondary mortgage market and student loan sales, and $39,000 more in Visa merchant income. The efficiency ratio also improved because of a $172,000 reduction in overhead expense to $11.831 million; the second quarter 1998 level had been elevated to $12.003 million from the first quarter rate of $11.494 million predominantly due to certain one-time or periodic expenses and timing differences. The third quarter itself contains $150,000 in one-time expenses relating to the sublease of a vacated acquired branch facility and write-down of selected repossessed property (OREO). For the first nine months of 1998, the ratio of recurring noninterest income to operating income was 18.6%, a significant 3.4 percentage point increase over one year earlier, reflective of the company's strategy to increase its income sources that are less susceptible to interest rate fluctuation. For the same two periods, the company's recurring efficiency ratio was 58.7% this year versus 55.9% for 1997, which includes only one quarter's impact of that year's acquisitions. 14 YEAR 2000 The year 2000 issue is the result of computer programs being written using two digits rather than 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 established Year 2000 Committee, has identified critical vendors and processes and have put in place monitoring and measuring techniques to assure our critical vendors are complying with the Federal Financial Institutions Examining Council guidelines for Year 2000 compliance. The Company is subject to quarterly reviews by the Office of the Comptroller of the Currency (OCC) and to date there have been no significant findings as a result of their review. The Company presently believes that with modifications to existing software and conversions to new software, the year 2000 issue can be mitigated without impact on the Company's operation. The Company has initiated formal communications with all of its significant yet non-critical 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 event the vendor or customer should experience a Year 2000 compliant failure. To date, 56% of our vendors have responded that they are Year 2000 compliant, 30% have reported that they are working diligently and will be Year 2000 compliant, and 14% have not yet stated their position. We are closely following the progress of those vendors who are working on the project and will seek alternate vendors for all suppliers that can not become Year 2000 compliant or those vendors who have failed to respond to our inquiries. The Company is utilizing 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 up to $1,000,000. This budget estimate includes (but is not limited to) upgrades to Item Processing software and hardware, 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 is working toward completing the Year 2000 project by December 31, 1998. To date the Company has incurred approximately $250,000 of expenses related to the assessment of, and preliminary efforts in connection with, its Year 2000 project plan and remediation effort. The costs of the project and the date on which the Company plans 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. There can be no guarantee that these estimates will be achieved. 15
SUPPLEMENTAL SCHEDULES A) The following table sets forth certain information concerning average interest-earning and interest-bearing liabilities and the yields and rate 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 amount earned include loan fees. Nonaccrual loans have been included in interest earnings for purposes of these computations. Third Quarters Ended September 30, (000's omitted except yields and rates) 1998 1997 Avg. Amt. of Avg. Yield/ Avg. Amt. of Avg. Yield/ ASSETS: Balance Interest Rate Paid Balance Interest Rate Paid ------- ------- --------- ------- -------- ---------- Interest-earning assets: Federal funds sold $8,191 112 5.41% 44,504 618 5.51% Time deposits in other banks 35 0 5.30% 35 1 5.81% Taxable investment securities 585,391 9,552 6.47% 575,334 11,090 7.65% Nontaxable investment securities 35,465 673 7.53% 18,122 395 8.65% Loans (net of unearned discount) 898,992 21,165 9.34% 800,598 19,221 9.52% -------------- --------------- Total interest-earning assets 1,528,074 31,502 8.18% 1,438,593 31,325 8.64% Noninterest earning assets Cash and due from banks 55,615 53,709 Premises and equipment 24,649 21,154 Other Assets 82,709 81,456 Less:allowance for loans (12,270) (11,634) Net unrealized gains/(losses) on available-for-sale portfolio 3,831 3,875 -------------- --------------- Total 1,682,608 1,587,153 ============== =============== LIABILITIES AND SHREHOLDERS' EQUITY: Interest-bearing liabailities Savings deposits 511,138 3,060 2.38% 495,112 3,111 2.49% Time deposits 685,490 9,634 5.58% 666,045 9,414 5.61% Short-term borrowings 7,182 103 5.71% 424 7 6.44% Long-term borrowings 115,514 1,979 6.80% 103,172 1,854 7.13% Total interest-bearing ------------------------ --------------------------------- liabilities 1,319,324 14,776 4.44% 1,264,753 14,386 4.51% Noninterest bearing liabilities Demand deposits 220,294 193,467 Other liabilities 19,929 17,041 Shareholders' equity 123,061 111,892 -------------- --------------- Total 1,682,608 1,587,153 ============== =============== Net interest earnings 16,726 16,939 ========== ================== Net yield on interest-earning assets 4.34% 4.67% ============= ============== Federal tax exemption on nontaxable investment securities included in interest income 214 127
16
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: (000's omitted) 3rd Quarter 1998 Compared to 3rd Quarter 1997 Increase (Decrease) Due to Change In: (1) Volume Rate Net Change ------ ---- ---------- Interest earned on: Federal funds sold and securities purchased under agreements to resell (504) (2) (506) Time deposits in other banks -- (1) (1) Taxable investment securities 194 (1,732) (1,538) Nontaxable investment securities 378 (100) 278 Loans (net of unearned discounts) 2,361 (417) 1,944 Total interest-earning assets (2) 1,949 (1,772) 177 Interest paid on: Savings deposits 101 (152) (51) Time deposits 275 (55) 220 Short-term borrowings 110 (14) 96 Long-term borrowings 222 (97) 125 Total interest-bearing liabilities 620 (230) 390 Net interest earnings (2) 1,053 (1,266) (213)
(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. 17
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 September 30, Nine Months Ended September 30, Change Change Change Change 1998 1997 Amount Percent 1998 1997 Amount Percent ---- ---- ------ ------- ---- ---- ------ ------- Personnel expense 6,357 6,148 209 3.4% 19,343 16,634 2,709 16.3% Net occupancy expense 1,041 905 136 15.0% 3,116 2,475 641 25.9% Equipment expense 993 644 349 54.2% 2,609 1,954 655 33.5% Professional fees 708 816 (108) -13.2% 1,466 1,577 (111) -7.0% Data processing expense 969 1,215 (246) -20.2% 2,988 2,709 279 10.3% Amortization 1,178 1,163 15 1.3% 3,553 2,583 970 37.6% Stationary and supplies 333 448 (115) -25.7% 1,051 1,091 (40) -3.7% Deposit insurance premiums 48 47 1 2.1% 143 96 47 49.0% Other 1,361 900 461 51.2% 4,549 3,773 776 20.6% Total 12,988 12,286 702 5.7% 38,818 32,892 5,926 18.0% Total operating expenses as a 3.06% 3.07% -0.01% pts 3.10% 3.01% 0.09% pts percentage of average assets Efficiency ratio 57.2% 54.8% 2.40% pts 58.7% 55.9% 2.80% pts (excl sec.gains & intang. amort) D) The amounts of the Bank'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 1998 1997 Amount Percent ------ ------ ------ ------- Real estate mortgages: Residential 256,408 236,682 19,726 8.33% Commercial Loans secured by real 117,408 62,593 54,815 87.57% estate Farm 12,044 8,595 3,449 40.13% Total 385,860 307,870 77,990 25.33% Commercial, financial, and agricultural Agricultural 23,348 23,111 237 1.03% Commercial and financial 151,981 121,112 30,869 25.49% Total 175,329 144,223 31,106 21.57% Installment loans to individuals: Direct 109,690 74,228 35,462 47.77% Indirect 206,536 192,392 14,144 7.35% Student and other 6,626 13,857 (7,231) -52.18% Total 322,852 280,477 42,375 15.11% Other Loans 5,581 7,306 (1,725) -23.61% Gross Loans 889,622 739,876 149,746 20.24% Less: Unearned discounts 1,526 3,999 (2,473) -61.84% Reserve for possible loan 12,441 9,599 2,842 29.61% losses Net loans 875,655 726,278 149,377 20.57%
18
E) The following table presents information concerning the aggregate amount of nonperforming assets: (000's omitted) As of September 30. Change Change 1998 1997 Amount Percent ----- ----- ------ ------- Loans accounted for on a nonaccrual basis 2,726 1,903 823 43.2% Accruing loans which are contractually past due 90 days or more as to principal or interest payments 1,629 2,459 (830) -33.8% ------ ------ ----- ------ Total nonperforming loans 4,355 4,362 (7) -0.2% 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" 138 0 138 Other real estate 1,248 872 376 43.1% ------ ------ ---- ----- Total nonperforming assets 5,741 5,234 507 9.7% Ratio of allowance for loan losses to period-end loans 1.37% 1.50% Ratio of allowance for loan losses to period-end nonperforming loans 286.00% 284.00% Ratio of allowance for loan losses to period-end nonperforming assets Ratio of nonperforming assets to period-end total loans and other real estate owned 0.62% 0.63%
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. 19
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 1998 1997 Amount Percent 1998 1997 Amount Percent Amount of loans outstanding at end of period 910,974 830,258 80,716 9.7% 910,974 830,258 80,716 9.7% Daily average amount of loans (net of unearned discount) 898,992 800,598 98,394 12.3% 898,992 800,598 98,394 12.3% Balance of allowance for possible loan losses at beginning of period 12,441 9,599 2,842 29.6% 12,434 8,128 4,306 53.0% Loans charged off: Commercial, financial, and agricultural 129 86 43 50.0% 410 174 236 135.6% Real estate construction 0 Real estate mortgage 20 0 20 NA 20 25 (5) -20.0% Installment 1,235 1,088 147 13.5% 4,075 2,455 1,620 66.0% Total loans charged off 1,384 1,174 210 17.9% 4,505 2,654 1,851 69.7% Recoveries of loans previously charged off: Commercial, financial, and agricultural 51 42 9 21.4% 133 134 (1) -0.7% Real estate construction 0 0 Real estate mortgage 0 1 1 Installment 157 146 11 7.5% 529 398 131 32.9% Total recoveries 208 189 19 10.1% 662 533 129 24.2% Net loans charged off 1,176 985 191 19.4% 3,843 2,121 1,722 81.2% Additions to allowance charged to expense 1,176 1,235 (59) -4.8% 3,850 2,815 1,035 36.8% Reserves on acquired loans (1) 2,520 (2,520) -100.0% 3,547 (3,547) -100.0% Balance at end of period 12,441 12,369 72 0.6% 12,441 12,369 72 0.6% Ratio of net chargeoffs to average loans outstanding 0.13% 0.12% 0.43% 0.26%
(1) These reserve additions are attributable to loans purchased from Key Bank N.A. and Fleet Bank in association with the purchases of branch offices in June and July, 1997, respectively. 20
Noninterest Income (000's omitted) Three Months Ended Nine Months Ended Sep-98 Sep-97 Sep-98 Sep-97 Personal trust services 292 266 860 795 Financial product commissions 311 256 909 748 Service charges on deposits 883 788 2,439 1,911 Overdraft fees 846 642 2,150 1,529 Other service charges and fees 1,038 944 2,464 1,827 BPA/EBT income 594 455 1,761 1,369 Securities gains/losses 132 5 1,398 5 Other nonrecurring income 102 47 583 75 Total 4,198 3,403 12,564 8,259 Total noninterest income (excluding net securities gains/losses) as a percentage of operating income 19.6% 16.7% 18.6% 15.2% Total noninterest income (excluding net securities gains/losses) as a percentage of average assets 0.96% 0.86% 0.89% 0.76%
21 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 b) Reports on Form 8-K: N/A 22 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 13, 1998 /s/ SANFORD A. BELDEN ------------------------------- Sanford A. Belden, President and Chief Executive Officer Date: November 13, 1998 /s/ CHARLES M. ERTEL -------------------------------- Charles M. Ertel, Assistant Treasurer (Chief Accounting Officer) 23 EX-27 2 FDS
9 1,000 9-MOS DEC-31-1998 SEP-30-1998 57,081 0 0 0 593,085 9,040 9,116 909,448 12,441 1,659,357 1,402,905 2,000 17,048 80,000 7,622 29,809 0 119,975 1,659,357 61,552 31,568 278 93,398 38,063 44,793 48,604 3,851 1,398 38,818 18,499 11,762 0 194 11,956 1.57 1.54 0 0 0 0 0 0 0 0 0 0 0 0
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